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Abstract

  1. Top of page
  2. Abstract
  3. Ideas and Policymaking in Hard Times
  4. French Statist Liberalism and Keynesianism by Default
  5. German Corporate Liberalism and Keynesianism by Stealth
  6. Ideas, Liberal Traditions, and the Drivers of Economic Adjustment
  7. Acknowledgments
  8. References

This article argues that distinctive liberal traditions shaped France and Germany's Keynesian policy responses to the post-2007 economic crisis. In France, “statist liberalism” privileges an activist state that favors macroeconomic intervention and investment. German “corporate liberalism,” by contrast, is more pluralist and emphasizes the powers and responsibilities of social and economic groups, who are viewed as the fundamental components of the social order. The article argues that these traditions shaped elite interpretations of the crisis and played central roles in defining policy trajectories. They informed a modest French response focused on macroeconomic stimulus that relied on existing income support and a larger German effort centered on a microeconomic strategy of group subsidization. It concludes that these outcomes are inconsistent with traditional institutional accounts and highlights the importance of research on the role of ideas in shaping national responses to economic crises.

In the ongoing post-2007 economic crisis, the political economies of the advanced industrial world find themselves at a moment of transition. Both the prevailing economic realities and the interpretive frameworks used to understand them have shifted markedly since the 1990s and early 2000s. At that time, generalized (but ultimately fragile) economic prosperity furnished a rationale for a neoliberal economic model and the widespread faith that markets provide the sole means for durable prosperity. During the past five years, by contrast, the most severe downturn since the 1930s has forced scholars and policymakers to question anew the appropriate scope for markets and role of the state. Failed predictions of withering states and hegemonic markets have been replaced by a murkier conceptual universe in which both markets and states play central roles, even if the balance between their respective purviews remains the subject of often acrimonious debate.

At first, many in Western Europe saw the crisis as vindication of the continent's social and economic model, whose proponents have long viewed with skepticism the Anglo-American model of minimalist states and expansive markets. That said, many governments retained components of the liberalizing agenda of the previous decade, which involved a supply-side strategy that emphasized reducing nonwage labor costs, cutting jobless benefits, and activating labor markets (Vail 2010). At the time, most policymakers, even on the left, saw some version of this recipe as the only viable replacement for a Keynesianism discredited by the stagflation of the 1970s.

The post-2007 crisis has led many to question these received wisdoms, as many governments turned to Keynesian policies designed to boost employment and growth. To be sure, this rehabilitation of Keynes has been contested, with much debate about its efficacy and recent reversals. This contestation has deepened during the past two years, when a so-called “sovereign debt crisis” (really a bond-market crisis exacerbated by the deflationary euro zone policy regime) has led many governments to turn to austerity. Nonetheless, the debate between advocates of Keynesianism and austerity is far from settled, and what economist Gregory Mankiw once dismissed as “outdated” Keynesian theory clearly constitutes an important component of policy arsenals for the first time in three decades (Posner 2009).

That said, the scope and character of the post-2007 Keynesian revival varied widely across countries, a diversity of which France and Germany offer stark examples. Though institutional factors, such as existing frameworks of social protection and varying state capacities, have clearly played a role in shaping French and German responses to the crisis, this article argues that conventional accounts that emphasize the role of state capacities and state–society relations (e.g., Katzenstein 1987; Hall 1986) are inadequate for explaining national responses. Conventional rationalist accounts, which view politics as the pursuit of stable interests under conditions of relatively complete information (e.g., Frieden and Rogowski 1996), are likewise unable to account for cross-national or intertemporal variations in elite responses that are not reducible to interests that are knowable a priori.

In contrast to such approaches, this article argues that ideas—here cast as national liberal traditions1—have powerfully shaped French and German adjustment, as shifting ideational landscapes have altered prevailing interpretive frameworks and helped to define the range of policy alternatives. In both countries, the structure of existing “automatic stabilizers,” such as unemployment insurance, represented a baseline with respect to which the need for stimulus was considered. In addition, differences in state capacity affected the speed with which governments enacted stimulus measures, once the decision to do so was made. At the same time, however, ideational factors governed the extent to which authorities turned to deficit spending and, equally important, the content of these policies, in ways that neither standard institutionalist nor rationalist accounts can explain. In France, policymakers interpreted the crisis through a lens of “statist liberalism,”2 with an emphasis on legal equality, state guidance of economic development, a constrained extension of market forces, and macroeconomic strategies designed to boost national income rather than protecting or subsidizing particular groups. This response, which conforms to venerable images of aggressive intervention by a dominant state but was informed by a greater reliance on noncontributory benefits to support incomes,3 was colored by President Nicolas Sarkozy's close relationships with the business community and his ambivalence about neoliberalism (Levy 2010). In Germany, by contrast, a tradition of “corporate liberalism”4 yielded an extensive stimulus that few would have expected from the limited state central to established narratives about neocorporatist German politics.5 These measures were packaged largely as tax cuts and subsidies aimed at particular groups (notably small and medium-sized businesses, industrial workers in export sectors, and families with children), rather than as macro-oriented measures designed to boost aggregate demand.

Paradoxically, then, Germany, a country traditionally averse to state intervention, adopted stimulus measures that were much larger than those adopted in statist France. In both countries, the form and content of these distinctive responses to the economic crisis were shaped by national traditions of liberalism and attendant elite conceptions of the relationship among groups, individuals, and public authority. They did not derive solely from economic necessity or preexisting institutional frameworks, nor did they represent straightforward responses to the preferences of interest groups. Instead, they were driven by distinctive and evolving interpretations of the crisis.

The next section explores recent work on the role of ideas and its relationship with traditional approaches to comparative political economy that focus on state capacity and interest groups. The article then details France and Germany's Keynesian turns and situates them within each country's distinctive liberal traditions. It concludes with a discussion of the place of ideational approaches in contemporary scholarship and implications for the ongoing European debt crisis.

Ideas and Policymaking in Hard Times

  1. Top of page
  2. Abstract
  3. Ideas and Policymaking in Hard Times
  4. French Statist Liberalism and Keynesianism by Default
  5. German Corporate Liberalism and Keynesianism by Stealth
  6. Ideas, Liberal Traditions, and the Drivers of Economic Adjustment
  7. Acknowledgments
  8. References

Economic crises discredit existing arrangements and lead to searches for new interpretive models. If ideas are always important to politics, therefore, they are particularly so when inherited policies and institutions fail, as elites work to understand what caused the failure and to identify a solution. In this way, the Great Depression gave rise to the Keynesian Revolution, and the stagflation of the 1970s helped to enshrine neoliberal and monetarism as orthodoxies.6 Just as crises often spawn new interpretive frames, periods of growth and prosperity tend to suppress alternative understandings in favor of the ideas that prosperity purports to vindicate. Until 2007, it was widely assumed that liberalization had become a permanent, if politically contested, feature of the economic landscape, just as markets were presumed to be the sole proper organizing principle of capitalism. The ascendance of neoliberalism, the hypothesis that “globalization” was inexorably eroding governments' discretion, and the ostensible discrediting of Keynesianism all suggested a future in which liberalization and supply-side approaches were to be assumed.

The dominance of neoliberalism in the 1980s and 1990s both contributed to and reflected the marginalization of ideational approaches to comparative political economy. With liberalization as the assumed economic paradigm, there was little impetus for systematic research into the role of ideas, which tended to wash out of the analytical equation. There were some exceptions to this broad neglect, such as Peter Hall's (1989) seminal investigation of postwar Keynesianism. Such work remained rare, however, with the focus in comparative politics squarely on various “institutionalisms,” with an attendant emphasis on ontologically stable and epistemologically straightforward interests.7 Much of this work, in the broad tradition of “historical institutionalism,” focused on state capacity and the resulting ability of policymakers to implement reforms. Such work generally fell into one of two broad categories. The first, involving work “national models of capitalism,” built on Andrew Shonfield's (1965) seminal Modern Capitalism, which explored the diversity of postwar models of capitalism and varying relationships between the state and interest groups. Scholars inspired by Shonfield's work share an understanding of institutions as “the formal rules, compliance procedures, and standard operating practices that structure the relationship between individuals in various units of the polity and economy” (Hall 1986, 19). As a result, they tend to view states' capacities as constitutive of fairly predictable policy patterns. In “statist” France, such approaches would expect the state to intervene rapidly and extensively. In Germany, by contrast, long viewed as a system with a “semi-sovereign state” (Katzenstein 1987) in which political authority is divided and consensus valued, one would expect the state to intervene reluctantly and on a limited basis. Such work dovetailed with a burgeoning literature on the state and state capacities in the 1980s and 1990s, which privileged the state as an analytical focus and criticized its absence in the pluralist and behavioralist traditions (e.g., Weir and Skocpol 1985).

The other, related approach focuses squarely on interest groups' avenues of policy influence, which are shaped by the institutional relationships between state and society (e.g., Berger 1981). Such work tends to assume relatively stable preferences among interest groups and relative epistemological stability within policy communities. Though they can explain some features of French and German policies (the close relationship between French business and the state and the German tendency to favor insider groups, for example), such group-based accounts are not well suited for explaining either sharp departures from established trajectories or cross-national policy variation. These limitations stem from a treatment of the politics of crisis as the products of stable networks of power and influence, which are unlikely to lead to departures from past practice.

During the past decade, research on the role of ideas has begun to gain favor among scholars increasingly dissatisfied with the limitations of traditional institutionalist approaches. John Campbell (2004, 115, 117), for example, argues that “crises often trigger institutional shifts in economic governance” and “enabl[e] them to recognize, re-examine, and ultimately reinterpret their previously taken-for-granted assumptions.” Such insights have paralleled recent, more systematic work on how ideas shape policy in periods of crisis. For example, Mark Blyth argues that we must resist the temptation to treat “interests as given and crises as unambiguous,” focusing instead on how “economic ideas provide agents with an interpretive framework,” which “allow[s] agents to … propose a particular solution to a moment of crisis” (Blyth 2002, 10 [fn. 20], 11). We are quite a long way here from the language of “incentives and constraints” favored by historical-institutionalist scholarship and even farther from structural or rationalist approaches that view policy outcomes as predictable products of stable social and economic vectors. This conception frames choice, not merely as an option among a set menu of options dictated by institutional frameworks or economic circumstances, but rather as a process that may rewrite and reframe the very menus from which such choice derives, creating a compelling story out of disconnected facts in ways that favor certain kinds of policies over others.

The approach adopted here incorporates insights from traditional institutional and group-based approaches but places greater emphasis on how ideas shape policy and calls for a conception of politics as an act of interpretation as well as an exercise of power. I argue that ideational legacies, here conceptualized as national liberal traditions, are composed of multiple strands that together tend to favor particular types of responses. Ideational frameworks play two critical roles in particular, which create both policy openness and cognitive fluidity. First, they act as filters (cf. Parsons 2003) through which elites interpret the crisis and appropriate scope and kinds of intervention for which it calls. Second, they act as anchors of certain kinds of policy trajectories, which connect elements of policy responses to past practice but allow governments to alter elements of these practices to reflect current circumstances. Because such traditions are multiple rather than homogeneous, however, they allow significant interpretive leeway and enlarge the range of available alternatives.

The remainder of this article applies this framework to an analysis of French and German responses to the post-2007 economic crisis, which led to significant departures from traditional policymaking patterns. It argues that distinctive liberal traditions, relating to conceptions of groups and individuals and their relationship to public authority, shaped the range of viable policy responses and the discursive strategies used to legitimate them. It begins with France, where a tradition of “statist liberalism,” which prioritizes the state as the engine of economic modernization and an emphasis on legal and economic equality, informed a modest macroeconomic stimulus that favored business interests even as it built on a robust network of quasi-universalistic income support. In Germany, by contrast, the tradition of “corporate liberalism,” informed by inter- and postwar Ordoliberalism,8 led to a larger but less direct fiscal stimulus that favored a microeconomic strategy of tax reductions and targeted support. In both cases, ideas influenced policy at a number of important critical junctures, when policymakers faced key choices about whether and how to depart from past practice.

French Statist Liberalism and Keynesianism by Default

  1. Top of page
  2. Abstract
  3. Ideas and Policymaking in Hard Times
  4. French Statist Liberalism and Keynesianism by Default
  5. German Corporate Liberalism and Keynesianism by Stealth
  6. Ideas, Liberal Traditions, and the Drivers of Economic Adjustment
  7. Acknowledgments
  8. References

French “statist liberalism” represents a synthesis of three distinctive strands in French political thought: first, a Republican emphasis upon individual equality; second, state responsibility for economic and societal welfare; and third, a vision of the state as the engine of modernization. Common to all of these strands is a deeply antipluralist view of groups as contravening societal interests by parochially seeking state action in their favor. This conception originated in the eighteenth century and particularly in the work of Benjamin Constant and Jean-Jacques Rousseau. For Rousseau, “if groups … are formed at the expense of the larger association, the will of each of these groups will become general in relation to its own members and private in relation to the state. … [T]here should be no sectional associations in the state, and the every citizen should make up his mind for himself” (Rousseau 1968, 73). Constant advances a similar thesis: “Liberty is every man's right to be subject to the law alone. … It is … every one's right to influence the administration of the state.”9 Inherent in such a conception is a tension between individual equality before the law and the state's role as its guarantor. It also reflects a substantive view of equality that differs markedly from the Anglo-American conception of the limited state, neutral with respect to individuals but with a limited capacity to intervene. Throughout the postwar period, French policymaking displayed both a strong statist tradition and a concern for individual legal (and, later, economic) equality, with particular strands becoming dominant as economic and political circumstances shifted. In essence, state intervention and active macroeconomic management became the means whereby the ends of economic growth and rising economic fortunes across the political economy (in keeping with older Republican distrust of particularistic interests) were pursued.

In terms of policy content, the French statist liberal tradition represents a synthesis of three distinct but interrelated strands of “liberalism,” some of which have been more dominant and influential at certain points in France's postwar history than at others. The first, which was particularly dominant during the postwar boom, involves an emphasis on state neutrality, embracing the state's role as a guide of the course of economic development but in ways that privilege macroeconomic strategy of promoting growth across the economy rather than favoring particular interest groups, except to the extent that favoring such groups (in particular, big business) is seen as instrumental to collective prosperity. The second, which became important in the 1980s, involves the expansion of market forces as the guiding force behind economic development but in ways that continued to privilege the state as a central actor. The third dimension of liberalism in the statist liberal tradition, which came to the fore in the 1990s and early 2000s, involves a growing reliance on noncontributory, means-tested income support, rather than contributory benefits that tend to favor insider groups. Each of these dimensions has left “footprints” in French policymaking,10 in ways that have been determined by the nature of the prevailing economic challenges, the evolving relationship between the state and interest groups, and the partisan character of the government in power.

The competing imperatives of state neutrality and responsibility were central to the historical French embrace of the state-led growth strategy after World War II. As Jonah Levy (1999, 10) describes, the postwar model “blended a Rousseauean notion of the ‘general will’ with a Saint-Simonian faith in enlightened technocratic leadership. Its central premise was that state authorities could promote economic modernization most effectively without the participation of narrow interest associations that might stand in the way.” This strategy reflected older French liberal conceptions of the state as the only reliable guarantor of legal equality, dating back to pre-Revolutionary notions of state neutrality. Equally important, it entailed a substantive component that only the state could protect—access to the economic goods that made political equality meaningful. As Shonfield (1965, 130–131) shows, however, this traditional prioritization of economic equality was colored during the postwar period by the promotion of big business over agriculture and small firms, which were seen as inimical to France's mission of rapid industrialization. This orientation reflected what Shonfield famously referred to as “a conspiracy in the public interest … between a number of like-minded men in the civil service and in big business.” This formulation highlighted the contradictions of the French statist liberal model: Even as the state “conspired” with large business concerns, whose promotion was the centerpiece of the country's modernization strategy, it also worked to foster and increasing prosperity for society as a whole. To the extent that the postwar French model was statist, therefore, it was so in ways that pursued the liberal (in the sense of nonparochial) ends of promoting broad prosperity, even if the means of so doing—favoring business over other groups—were often parochial and illiberal.

Following the near-Revolution of May 1968, this orientation was briefly displaced by an interlude of politically driven group subsidization arising from concern about economically vulnerable (and politically volatile) groups, such as small shopkeepers and industrial workers. In the early 1980s, however, this short-lived particularistic policy orientation was abruptly reversed, when the Socialist administration of François Mitterrand undertook an ill-fated experiment with “redistributive Keynesianism,” designed to undertake a “rupture with capitalism” and promote workers' incomes and wages (Levy 1999). Its failure gave way not to a return to the piecemeal, parochial politics of the previous decade, but instead to a liberal strategy of “competitive disinflation” and supply-side approaches to tackling unemployment. This liberal approach to labor-market governance, which would come to dominate French policymaking, centered on deregulation, limitations on benefits, and reductions in nonwage labor costs. Previously underdeveloped, this strand of statist liberalism came to coexist with a continued reliance on the state as the guiding force in the economy but now in a direction that was “liberal” in a different sense, drawing on the “footprint” of the component of French liberalism that emphasizes equality of opportunity and the legal equality of individuals vis-à-vis the state. At the same time, however, this impetus was accompanied by an expansion of the welfare state designed to protect citizens from the precariousness that it served to reinforce (Vail 2010, ch. 7). I summarize precrisis French economic and fiscal conditions and spending on unemployment insurance (as an indicator of “automatic stabilizers”) in Table 1.

Table 1. Economic Conditions and Automatic Stabilizers (France)
 20072009
  1. GDP, gross domestic product.

Sources: IMF (2010); OECD (2009a, 2011).
Unemployment rate8.4%9.5%
Budget deficit  
Amount in euros€51.78 billion€144.38 billion
% GDP2.7%7.8%
GDP growth2.3%−2.5%
Public unemployment insurance expenditures (% GDP)1.05%1.25%

The post-2007 crisis and recession destabilized this model, which had never been fully reconciled with the earlier, more illiberal statism. As governments struggled to avert another depression, the hands-off approach to economic policy seemed as inappropriate as it had previously seemed inevitable. The question became not whether the state should intervene in the economy, but rather how, to what extent, and on whose behalf. Jobs once again became a central preoccupation, though with a different menu of policy options than in the 1990s. As governments confronted the highest jobless rates since the early 1980s and France and Germany saw recent gains evaporate, many began to urge a return to Keynesian strategies.

Sarkozy's government was among the first in the Organisation for Economic Co-operation and Development (OECD) to shift course, embarking on a strategy to boost economic growth that was in keeping with the statist liberal tradition. In 2008, the government proposed a package of €26 billion, or about 1.3% of gross domestic product (GDP). Patrick Devedjian, one of Sarkozy's top economic advisors, expressed a sense of urgency, claiming that “all projects must start in 2009. … We want rapid results,” and criticizing the Americans as having “wasted a lot of time” (Schwartz 2009). The package prioritized public infrastructure projects, including four new high-speed rail lines, a new canal, renovations of public buildings, and investment in public enterprises (Cornudet 2008). This approach showed clear evidence of the same variant of statism that dominated the state-led industrialization of the postwar era.

The core of the French response thus centered squarely on macroeconomic stimulus in classical Keynesian fashion, though it did so mostly through investment rather than support for consumption. Sarkozy emphasized an efficient translation of spending into growth but did so with means that were in keeping with the traditional postwar statist promotion of business: “This crisis is structural, and over the long run it will change the economy, society, and politics” (Cornudet 2008). He demanded that public enterprises “accelerate their future investments,” as “events command us to move quickly in order to put the brakes on the recession” (Delacroix 2008a). This sense of urgency was echoed by Budget Director Eric Woerth, for whom the goal was “to spend as quickly as possible.” Laurent Wauquiez, Secretary of State for Employment, added: “This … is exclusively a policy designed to support job creation” (Agence France Presse Online 2008). This effort, which was widely viewed by workers as a sop to business, fueled union-led protests demanding support for workers' purchasing power and public employment. When asked about these demonstrations, Prime Minister François Fillon connected the package's prioritization of investment to job growth: “[The unions] should not be deceived about our priorities: today, the absolute priority is employment. Unemployment is continuing to rise. … In this context, the totality of our room for manoeuvre must be directed towards employment and towards the economy as a whole. This is what we will tell the social partners” (Guélaud, Landrin, and Leparmentier 2009). Rather than aggressively supporting consumption, the government assumed that the generous network of automatic stabilizers (expanded in the 1980s and 1990s), coupled with the economic growth that investment would promote, would accomplish this task. Then-Finance Minister Christine Lagarde observed, “The French model provides shock absorbers that were already in place. We haven't had to reinvent our unemployment, health, or welfare systems” (The Economist 2009b).

Faced with mounting protests and following a summit with union leaders, however, the government agreed to an additional €3 billion aimed at supporting consumption. The package included a €200 bonus for recipients of the Revenu minimum d'activité (RMA, or France's minimum income benefit), more generous unemployment benefits, and a €150 subsidy for low-income households (Cornudet 2009). It thus echoed the initial package's liberal orientation by focusing support on the poor rather than undertaking a broad attempt to boost incomes across the economy. Taken together, then, the two packages reflected statist liberalism's “statist” orientation (through direct spending and a macroeconomic strategy) and “liberal” footprints favoring means-tested income support and support for business.

France's statist liberal response also extended beyond fiscal policies and state expenditures, involving a significant bailout of French banks, a move that once again brought to the fore the statist component of French liberalism as well its receptiveness to microeconomic intervention when it is perceived to serve macroeconomic ends. Natixis, the investment house connected to Banque Populaire and Caisse d'Epargne, was heavily exposed to the subprime markets that had roiled the American financial system. In a deal brokered by Sarkozy in autumn 2008, the two banks were merged in order to save Natixis from bankruptcy, reflecting a broader pattern of cooperation between French finance and the state (Jabko and Massoc 2012, 17–18). This initial move was followed by a substantial bailout, announced on October 12, which made €360 billion (about 18% of GDP) available to vulnerable banks, resulting in expenditures of 5.6% of GDP. The bailout set up two funds: one to raise capital and provide liquidity to ailing banks and a second to help recapitalize them (Grossman and Woll 2012, 14, 23).11 Sarkozy's announcement of the plan reflected both his probusiness stance and French liberalism's macroeconomic orientation. The package was designed to “protect French citizens' jobs, their savings, and their tax revenues. … By offering the state's protection, we can hope that we will not have to impose on our compatriots the enormous costs that would result from a collapse of the financial system” (Delacroix 2008b).

The bank bailout aside, France's stimulus measures were quite modest and, not unrelatedly, focused overwhelmingly on direct spending designed to revitalize the macroeconomy. By 2010, France had spent a total of €38.8 billon on stimulus measures (1.75% of GDP), about the same as the packages adopted in the ostensibly more liberal United States (1.9%) and United Kingdom (1.4%). Of that amount, only 6.5% was composed of tax cuts (compared to 45.4% in Canada and 34.8% in the United States), with the rest composed of direct spending (Prasad and Sorkin 2009). About €10 billion was spent on public investment, including infrastructure (€1.4 billon), defense (€1.4 billion), publicly funded research (€700 million), monument restoration (€600 million), and subsidies to public enterprises (€4 billion) (Delacroix 2008a). That said, as noted above, officials felt that the country's generous safety net12 could do much of the work of sustaining demand.13 The package was also quite short term, with 75% of the spending taking place in 2009 and only 25% (including the time-delimited income-support measures) in 2010 (OECD 2009b). This modest response was particularly surprising given France's relatively dire economic situation: In 2009, French GDP shrank by 2.5% and, by the end of the year, unemployment had risen to 9.5%, compared to Germany's 7.8%.

Though the existence of generous automatic stabilizers helps to explain the package's relatively small size, this factor alone cannot explain why one of the advanced industrial world's most traditionally interventionist states, facing dire economic conditions, adopted a stimulus that was among the most modest in the G-20. Nor can it explain the overwhelming reliance on direct spending rather than tax cuts, particularly given the generosity of existing income support. Despite the smaller size of the French response, direct spending on income maintenance was actually larger than Germany's, as shown later in Table 3. Furthermore, given that French unemployment remained well above Germany's, traditional notions of French statism would lead one to expect spending to grow over time. The fact that it has not provided powerful evidence for French policy makers' interpretation of the need for additional stimulus in light of existing protection and their strong preference for direct spending, which tends to have more of an impact on demand. To a large extent, then, the distinctive French variant of liberalism determined the form of intervention, which in turn informed its extent.

The statist liberal tradition thus shaped interpretations of and responses to the crisis in two important ways. First, it supported macroeconomic strategies that focused on public spending on infrastructure, investment, and subsidies to business and, to a lesser extent, income-support policies. Second, it favored a surprisingly small stimulus that relied on existing protections and emphasized efficient translation of spending into demand, rather than a more particularistic, and less certain, strategy of targeted subsidies or tax cuts. If French elites were willing to deploy the state, in other words, they did so through modest, macroeconomically oriented measures, even as they sold the package as a demonstration of Sarkozy's commitment not to “leave anyone behind.”14 As we have seen, both elements of this approach are consistent with distinctive, and partially inconsistent, dimensions of the French statist liberal tradition, reflecting both venerable statist impulses and the conception that individuals rather than groups are the state's primary constituencies. If the existing framework of social protection helps to explain the relatively modest size of France's stimulus, then, we must also consider France's liberal tradition if we are to understand the relationship between its size and substance.

In the next section, I contrast the French experience with the Keynesian turn in Germany, where the tradition of “corporate liberalism” governed a very different interpretation of the crisis and a distinct, and perhaps even more surprising, set of responses. This tradition, steeped in social Catholicism, Oroliberalism, and notions of subsidiarity, is relatively pluralist in inspiration and treats groups as the fundamental components of the social and economic order. This tradition has yielded greater reluctance to engage in high-profile intervention in the macroeconomy; when intervention has been adopted, it has favored a microeconomic strategy focused on core groups. As in the French case, explaining the size and the character of Germany's fiscal response to the economic crisis requires considering ideas alongside the influence of political institutions, interest group politics, and economic circumstances.

German Corporate Liberalism and Keynesianism by Stealth

  1. Top of page
  2. Abstract
  3. Ideas and Policymaking in Hard Times
  4. French Statist Liberalism and Keynesianism by Default
  5. German Corporate Liberalism and Keynesianism by Stealth
  6. Ideas, Liberal Traditions, and the Drivers of Economic Adjustment
  7. Acknowledgments
  8. References

The German liberal tradition conceives of equality and political responsibility largely in group terms. Accordingly, relatively autonomous groups are each responsible for the welfare of their constituent members and share political responsibility with other groups and the state. The state's role is to establish and maintain a competitive, fair framework of negotiation among such groups. At the same time, though “it behooves the state to set up and maintain the institutional framework of the free economic order, [it] should not intervene in the price-signaling and resources allocation mechanisms of the competitive economic process” (Sally 1998, 111; original italics).

This tradition grew out of interwar Ordoliberalism, developed by thinkers such as Walter Eucken and Wilhelm Röpke, who rejected both Smith and Hayek's atomistic liberalism and Hayekian laissez-faire, which “would lead to ‘a fettering of the state by private interests’ ” (Streit and Wohlgemuth 2000, 239, 247). Instead, they advanced a conception of structured freedom that understood groups as the fundamental units of society: “Every household and firm is part of a complete system, and every single economic action part of a complete process”; “firm and household are parts of the whole economy and the course of economic events in them is part of the course of events in the whole of society” (Eucken 1951, 304, 312). Despite this emphasis on groups, Ordoliberals like Eucken felt that giving them free rein risks enabling stronger groups to deform public policy such that “the volonté générale [would thus be] sacrificed on the altar of the various volontés particulières” (Sally 2003, 34). Just as the state, as the guarantor of a just legal order, constrains group power, its authority should be constrained by the power of the groups that it is to regulate.

After World War II, this tradition provided a template for the architects of the Social Market Economy, which combined a competitive capitalist economy with a generous welfare state and shared political responsibility among the state and social groups. The model's architects understood social cohesion as emerging spontaneously “ ‘from below,’ nurtured by traditions and conventions in the natural communities of the family, the church and localities. This facilitates self-help, self-responsibility, and civic-mindedness, all of which form the moral framework conditions enveloping and sustaining economic activity in the marketplace” (Sally 1998, 123). Rather than a collection of equal individuals bound up in a state-sustained social order, or left to their own devices behind a Rawlsian veil of procedural equality, this perspective viewed the state as the architect of the legal and institutional order and a referee needed to limit socially corrosive competition and imbalances in power.

This distinctive brand of liberalism dominated political discourse and informed policies throughout the postwar period. In the 1950s and 1960s, when their French and British counterparts opted for distinctive variants of Keynesianism, caution about state activism and inflation led German policymakers to exhibit “a bias in favor of deflationary macroeconomic policies … severe enough to culminate in the artificial creation of recession from time to time” (Hall 1986, 237). This framework led to the underdevelopment of active labor-market policies in favor of an emphasis on the shared responsibilities of capital and labor and an arms-length relationship between such groups and the state. Beginning in the mid-1990s, Germany shifted from its traditional strategy of labor-supply reduction to a focus on group-based activation, involving reductions in nonwage labor costs, expansions of targeted active labor-market programs, and cuts in jobless benefits and restrictions on eligibility. I present precrisis German economic and fiscal data and baseline spending on unemployment insurance in Table 2.

Table 2. Economic Conditions and Automatic Stabilizers (Germany)
 20072009
  1. GDP, gross domestic product.

Sources: IMF (2010); OECD (2009a, 2011).
Unemployment rate8.7%7.8%
Budget deficit  
Amount€4.9 billion€75.41 billion
% GDP0.2%3.1%
GDP growth2.7%−4.7%
Public unemployment insurance expenditures (% GDP)0.70%0.72%

Like their French counterparts, after 2007, German policymakers turned to Keynesianism in ways that were consistent with the country's distinctive liberal tradition. Despite historical German fears of inflation and debt and distrust of state power, Germany adopted quite ambitious economic stimulus measures between 2008 and 2010, amounting to €82.37 billion (4.0% of GDP, or more than twice the French figure), despite lower baseline jobless rates. At first, however, Germany's response seemed to conform to conventional images of German frugality and caution. Its stimulus was adopted much later than many others and only after a great deal of vacillation. In January 2008, Finance Minister Peer Steinbrück proclaimed that there was “absolutely no occasion” for “excessive pessimism” (Frankfurter Rundschau 2008), despite Germany's alarming collapse in GDP. Even in November 2008, when the Grand Coalition of Social and Christian Democrats finally unveiled the first package, it ruled out additional spending, with Chancellor Angela Merkel stating that Germany would not engage “in a senseless race to spend billions” (The Economist 2009a). The law, given the woolly moniker Konjunkturpaket I (“Economic Conditions Package I”), provided a mere €12 billion (0.25% of GDP), which Merkel hopefully claimed would trigger about €50 billion in investment. This apparent reluctance to shift to a robust Keynesian strategy was certainly not dictated by the fiscal situation in Germany, which was among the few advanced countries with a balanced budget in 2008 (von Borstel 2008). Nor was it consistent with prevailing economic conditions in the country, which experienced one of the most precipitous collapses in GDP in the advanced industrial world, (–4.7% in 2009, compared to −2.5% in France).

Such images were increasingly contradicted as the full measure of Germany's response became clear, however. In response to widespread criticism of the first package's limited scope, including a surprising push by the country's five conservative economic “wise men” to expand spending, the government faced a critical choice about whether to expand its stimulus measures. After much internal debate, particularly between the Finance and Labor Ministries, the government announced a second package (Konjunkturpaket II) in February 2009. This legislation involved €50 billion in spending and tax cuts totaling about 1.4% of GDP. The measure surprised many, with one Sozialdemokratische Partei Deutschlands (SPD) official calling it “an incredible change in direction” (Brahmst 2011) and a leading trade union official referring to it as “an unusual response to an unusual situation” (Official, Deutsche Gewerkschaftsbund 2011).15 Merkel herself called the measure the “most difficult domestic policy decision of my time as Chancellor” (Berliner Morgenpost 2009). The package aimed at supporting established, solid (and politically connected) enterprises, especially those in export industries, thereby playing to the German economy's strengths rather than compensating for its weaknesses. The president of the Bundesverband der mittelständischen Wirtschaft, a peak organization of small and medium-sized enterprises (SMEs), praised the government's assistance to “solid SMEs” who were having trouble obtaining credit (Agence France Presse [German] 2009). Another prominent business leader praised the tax cuts as providing critical relief “to households and small and medium-sized firms” (DDP Nachrichtsagentur online 2009). Despite longstanding skepticism about aggressive public spending, German officials felt compelled to depart from past timidity, in part as a result of the risks of erosion of export competitiveness.

Such apparently odd enthusiasm for a Keynesian initiative makes sense when analyzed through the lens of German corporate liberalism, as does the reliance upon tax cuts in a country in which neoliberal strategies are distrusted. Although the first package had focused almost exclusively on tax cuts, the second involved somewhat more direct spending, though aimed mostly at core groups in the Social Market Economy (particularly SMEs and skilled industrial workers in export sectors) rather than channeled through aggregate measures (Heyer 2011). Though the government aimed publicly to “maintain its distance” from demand management (Official, Bundesverband der Deutschen Industrie 2011), it realized that it needed to “ease pressures” on key social groups (Official, Deutsche Gewerkschaftsbund 2011), including core industrial firms and workers and other key constituencies, notably families with children. If the second package was surprisingly large given historical biases (one Labor Ministry official invoked the German ideal of the “slim state” to explain the strong preference for tax cuts over direct spending; Lang-Neyjahr 2011), it was also structured in ways that conformed to important strands of German liberalism, which influenced elites' decision making between the first and second laws.

In September 2009, the newly elected coalition of the Chrislich Demokratische Union Deutschlands-Christlich-soziale Union (CDU-CSU) and the liberal Freie Demokratische Partei (FDP) enacted a third measure, dubbed the “Economic Growth Acceleration Act,” which entailed further tax cuts, child benefits, and labor-market spending. The tax cuts amounted to €2.4 billion annually for companies and €945 million in valued-added tax (VAT) for hospitality services (an important constituency of the Bavarian CSU) while boosting child benefits €4.6 billion annually (Der Spiegel 2009). Widely criticized as a fiscally irresponsible “sop to the CSU and FDP” (The Economist 2009c), the €7 billion package was defended by the government in terms of group responsibilities and prerogatives. According to Economics Minister Rainer Brüderle, it aimed to reduce the tax burden faced by the Mittelstand, or Germany's powerful small and medium-sized firms, a claim echoed in interviews with other officials (e.g., Heyer 2011). Aside from tax subsidies, the vast majority of the reductions (about 54% of the total) involved an increase in the standard per child tax exemption coupled with a €20 increase in the monthly child allowance (Der Spiegel 2009). The overarching German strategy was thus to subsidize insider groups and reinforce existing strengths rather than shore up incomes and boost demand throughout the economy. This strategy was also consistent with Germany's relatively hands-off efforts to shore up its banking system, which was modest compared to the French bailout, though German banks were hit harder by the crisis (Hardie and Howarth 2009). Whereas French elites viewed the crisis as one of demand and investment and therefore made assistance to the banks a priority, such a move would not have been consistent with the German understanding of the crisis as one of labor-market stability and export competitiveness.16

This twin narrative of economic growth and group prosperity dovetailed with the measure's other major component: an extension of the then-10-month-old Kurzarbeit (“Short-Time Work”) program. This program provides subsidies for (mostly core industrial) workers to compensate for cuts in working hours, thereby limiting firms' incentive to lay them off. According to the Federal Labor Agency, the measure had saved 400,000 jobs and covered 1.4 million workers by late 2009 (Dempsey 2009), resulting in expenditures of about $272 million in 2008 and $2.85 billion in 2009 (Saltmarsh 2009). At the end of the first quarter of 2009, more than 700,000 workers, or 20% of the workforce, were participating in the metalworking sector alone (Der Tagesspiegel 2009). In early 2010, about 1.5 million workers were enrolled overall, and the program saved about 220,000 jobs in 2008 and 2009, resulting in a 0.75% decline in the unemployment rate (Bundesagentur für Arbeit Statistical Database 2011; OECD 2011). This program protected jobs and subsidized existing relationships between capital and labor, rather than attempting to create employment directly, in the French fashion. With an unemployment rate of only 7.6% in July 2010, compared to 10.0% in France and 9.6% in the United States, Germany had clearly succeeded in mitigating job losses.17 One union official called the program an “optimal instrument,” given the discretion that it allows for targeting key groups of workers (Official, Deutsche Gewerkschaftsbund 2011). If the reluctance to embrace aggressive stimulus was filtered through the lens of German corporate liberalism, so, too, was the reliance on Kurzarbeit, which was anchored in the fundamental assumptions at the heart of the German model.

Germany's stimulus measures in 2009–2010 were thus both surprisingly extensive and consistent with the German liberal tradition with respect to their composition. Ultimately, Germany adopted the largest fiscal stimulus of all major European countries and the fifth largest (tied with Korea) among G-20 nations (Jha 2009, 3). In 2009, its total stimulus amounted to about $130.4 billion, or 3.4% of GDP, almost six times as large as France's ($20.5 billion) in monetary terms and nearly five times as large as a share of GDP (Prasad and Sorkin 2009). Taken together, German stimulus spending between 2008 and 2010 amounted to roughly 4.0% of GDP (ILO 2010, 33). This result is surprising at first glance, given France's history of state-led economic growth and Germany's broad division of political authority. When one looks at the composition of the two countries' stimulus, however, the outcomes are easier to explain. Although France's more modest stimulus measures and job creation efforts were composed almost entirely of direct spending rather than tax cuts (93.5% vs. 6.5%) and seen as a complement to the existing network of social protection, Germany's were composed mostly of tax reductions (68%) and viewed as a crisis-driven effort to defend competitiveness based upon skilled labor (Prasad and Sorkin 2009, 5).

As in the French case, there is a connection between the size and scope of German stimulus spending: Because tax cuts are less effective than direct spending at boosting demand, they must be larger to have an effect of a similar magnitude, all else equal. That said, neither Germany's division of political authority and ostensible penchant for political consensus, nor an account centered on the preferences of interest groups (both families and export firms were favored despite the latter's greater resources and better organization, for example), can explain either why German officials adopted such an extensive package in the first place or why it consisted mostly of tax cuts and subsidies to core groups.18 I summarize French and German stimulus measures in Table 3.

Table 3. French and German Economic Stimulus Measures, 2008–2010
 FranceGermany
  1. RMA, Revenu minimum d'activité.

Sources: ILO (2010); Le Gouvernement Français (2008); Leifels, Moog, and Raffelhüschen (2009); Jha (2009); and author's calculations.
Total stimulus  
Amount€38.8 billion€82.34 billion
% GDP1.75%4.0%
Distribution of stimulus  
Direct spending93.5%32%
Tax cuts6.5%68%
Additional stimulus-related labor-market spending  
Amount in euros€12.38 billion (RMA and other income support)€3.7 billion (Federal spending on Kurzarbeit)
% GDP0.65%0.15%

In 2010, the mounting European debt crisis led Germany to undertake a partial reversal of its Keynesian policies. Forceful (if implausible) domestic criticism about the country's debt led the government to adopt €80 billion in budget cuts by 2014 and is designed to move toward the elimination of “structural” debt by 2016, as required by a recent constitutional amendment. Merkel and Finance Minister Wolfgang Schäuble proposed cuts in contributions for the poor to the state pension system, heating subsidies, and child benefits. At the same time, the so-called Sparpaket avoided cuts to education, infrastructure investment, and research, all critical for long-term economic growth (The Economist 2010). It also avoided tax increases and sheltered the same core groups (primarily industrial workers and SMEs) that had benefited from the stimulus, leaving unemployment benefits untouched and maintained funding for the Kurzarbeit program. For all of their demonstrative symbolism (in part a response to voters' criticism of the Greek bailouts), the cuts were relatively modest (amounting to less than 1% of GDP over four years). To the extent that they were significant, they placed a disproportionate burden on outsiders, particularly the unincorporated poor. Michael Sommer, head of Germany's leading union federation, agreed: “They want to hit the poor and protect the big fish” (Boyes 2010).

As in the French case, then, understanding Germany's response to the economic crisis requires situating it within the country's liberal tradition. Expressed in the Ordoliberal emphasis on an organically constituted, quasi-pluralistic social order, German liberalism encourages a state that is nurturing, reluctant to intervene aggressively, and respectful of traditional group prerogatives. This discourse encouraged an expansive, though somewhat masked and indirect, fiscal response to the economic crisis. The emphasis on tax cuts; subsidies for families, export firms and SMEs, and core industrial workers; and efforts to avoid layoffs rather than creating jobs directly—all are institutionally grounded in the SME and ideationally grounded in German corporate liberalism.

Ideas, Liberal Traditions, and the Drivers of Economic Adjustment

  1. Top of page
  2. Abstract
  3. Ideas and Policymaking in Hard Times
  4. French Statist Liberalism and Keynesianism by Default
  5. German Corporate Liberalism and Keynesianism by Stealth
  6. Ideas, Liberal Traditions, and the Drivers of Economic Adjustment
  7. Acknowledgments
  8. References

This article has argued that France and Germany's liberal traditions heavily influenced the two countries' responses to the post-2007 economic crisis. In France, where elites saw a crisis of aggregate demand, they favored a rapid response that emphasized infrastructure investment, subsidization of business and job creation, and direct state spending. In part due to the presence of generous social protection arrangements, however, it also encouraged a modest response that is inconsistent with the French tradition of dirigisme. In Germany, by contrast, where elites viewed the crisis as one of competitiveness and labor-market stability, authorities adopted a masked but surprisingly extensive fiscal stimulus composed largely of tax cuts and targeted subsidies.

Viewing the French and German responses through an ideational lens helps to explain policy responses that attention to institutional and conjunctural factors alone cannot. In France, the rapid turn to demand stimulus and the fanfare that accompanied it were consistent with traditional policy approaches. At the same time, however, they belied the package's modest scope, which relied much upon existing benefits to boost demand, whereas new spending was structured overwhelmingly in a statist liberal vein, including both the stimulus package itself, which favored investment over consumption, and the extensive bank bailout, which reflected the traditional dirigiste alliance between the state and finance. In Germany, by contrast, authorities turned hesitantly to Keynesian strategies but ultimately acted much more aggressively than conventional accounts would suggest. Rather than favoring direct spending, as in France, however, they relied largely upon subsidies and tax cuts aimed at insider groups such as industrial workers, SMEs, and families with children. Though German banks were hit harder by the crisis, moreover, its bailout was much smaller than France's, reflecting officials' understanding of the crisis as primarily a threat to export competitiveness and labor-market performance.

Though a detailed analysis of this question is beyond the scope of this article, these traditions continue to shape responses to the ongoing European debt crisis. In Germany, modest budget cuts have largely sheltered the core groups who benefited from earlier stimulus. In France, the cuts and tax increases implemented by Sarkozy were even more modest and generally favored business,19 whereas newly elected Socialist President François Hollande campaigned on promises to reverse them and adopt new spending initiatives, including hiring 60,000 additional teachers and subsidizing 150,000 new youth jobs, rolling back Sarkozy's increase in the retirement age, and boosting the annual back-to-school allowance by 25%. He has promised to finance these measures (and to address a deteriorating fiscal context) in part through a 75% tax on households with annual incomes over €1 million and higher taxes on large firms (Carnegy 2012) while also raising the minimum wage to support consumption.20 Although Sarkozy's variant of statist liberalism tended to favor finance, big business, and investment, Hollande's leftist strand emphasizes universalistic measures to boost consumption and increase economic equality, a posture consistent with both France's post-1980s expansion of the welfare state and Hollande's resistance to Merkel's single-minded pursuit of austerity. In both countries, then, distinctive elements of national liberal traditions are shaping policymaking during the debt crisis in ways that parallel their influence on their earlier turns to Keynesianism.

This article provides significant evidence for the power of ideas in shaping national responses to economic crises, filtering interpretations of the nature of the crisis, and defining the parameters of viable policy alternatives. To be sure, systematically investigating the role of ideas in economic policy is not easy, which is one reason why many scholars have tended to approach the topic with caution. Clearly, incorporating ideas into our analytical strategy requires going well beyond bald assertions that ideas matter to tracing out the political mechanisms through which this influence is exerted. At the same time, this article suggests a number of avenues for how such a task might fruitfully be approached and for thinking more broadly about how ideas shape patterns of economic adjustment in both hard times and periods of prosperity.

Acknowledgments

  1. Top of page
  2. Abstract
  3. Ideas and Policymaking in Hard Times
  4. French Statist Liberalism and Keynesianism by Default
  5. German Corporate Liberalism and Keynesianism by Stealth
  6. Ideas, Liberal Traditions, and the Drivers of Economic Adjustment
  7. Acknowledgments
  8. References

The author wishes to thank Zoë Clements and Marion Wieser for research assistance; the School of Liberal Arts at Tulane University, the Hanse Wissenschaftskolleg, the American Council of Learned Societies, and the Center for Advanced Study in the Behavioral Sciences at Stanford University for institutional and financial support; and Mark Blyth, Robert Fannion, Peter Hall, Chris Howell, Tom Langston, Deborah Mabbett, Waltraud Schelkle, Aaron Schneider, Charlotte Maheu Vail, participants at the “Politics in Hard Times” workshop at the University of Mannheim, participants in the workshop on “Germany and the Financial Crisis” at Georgetown University, and three anonymous reviewers at Governance for helpful suggestions on earlier versions of this article.

Notes
  1. 1

    By “liberalism,” I have in mind distinctive, historically evolved conceptions of state power, involving both “negative” limitations on that power and substantive, “affirmative” conceptions of how the state should act, and on whose behalf, within such limitations.

  2. 2

    This term is consistent with Levy's (2010) analysis.

  3. 3

    For analyses of French statism, see Hall (1986) and Levy (1999).

  4. 4

    From the Latin corpus.

  5. 5

    The seminal work here is Katzenstein (1987).

  6. 6

    Peter Gourevitch (1986, 17) eloquently captures this logic: “In prosperous times it is easy to forget the importance of power in the making of policy. … In difficult economic times … patterns unravel, economic models come into conflict, and policy prescriptions diverge.”

  7. 7

    Much recent work on institutional change implicitly recognizes that shifting ideational frames can influence policy regimes but tends to adopt a narrow, rule-based conception of institutions. See, for example, Mahoney and Thelen (2010).

  8. 8

    For an overview, see Sally (1998, ch. 6).

  9. 9

    Quoted in De Ruggiero (1927, 167–168).

  10. 10

    I borrow the notion of “footprints” left on French policymaking by “ideational building blocks” from Ben Clift (2012) while emphasizing different ideational traditions. I am indebted to an anonymous reviewer at Governance for this suggestion.

  11. 11

    As Grossman and Woll (2012) point out, net expenditures were actually somewhat less, because the state earned a €2.4 billion return on expenditures.

  12. 12

    In 2005, France spent 1.2% of GDP on noncontributory, income support, compared to 0.6% in Germany (ILO 2010, 264).

  13. 13

    The package's limited size was related to its scope, as direct spending tends to have a greater stimulative effect than tax cuts by a ratio of about 1.6:1 (Jha 2009, 1).

  14. 14

    Quoted in Levy (2010, 16).

  15. 15

    All translations of statements from interviews are the author's.

  16. 16

    The influence of ideas becomes even clearer when one recalls the central role that German banks have long played in the economy.

  17. 17

    The program's expansion in July 2010 increased workers' eligibility from 18 to 24 months and exempted participating firms from social contributions.

  18. 18

    Though my findings are thus partially consistent with Palier and Thelen's (2010) portrait of German “institutionalized dualism” between protected insiders and increasingly exposed outsiders, this image cannot explain either the strong German preference for tax cuts or the benefits accruing to other core groups, such as families and the Mittelstand.

  19. 19

    Sarkozy proposed €65 billion in budget cuts and tax increases in 2011, with only €7.5 billion scheduled for 2012 and most requiring implementation after the 2012 presidential election.

  20. 20

    Although Germany's more favorable fiscal situation after 2009 did provide officials with more room for maneuver than that enjoyed by their more strapped French counterparts, this fact cannot explain either the discrepancies between the two stimulus packages' initial size or their composition.

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  2. Abstract
  3. Ideas and Policymaking in Hard Times
  4. French Statist Liberalism and Keynesianism by Default
  5. German Corporate Liberalism and Keynesianism by Stealth
  6. Ideas, Liberal Traditions, and the Drivers of Economic Adjustment
  7. Acknowledgments
  8. References
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