The most remarkable thing about this ordoliberalization of Europe is how it replicates the same error often attributed to the Anglo-American economies: the insistence that all developing states follow their liberal instruction sheets to get rich, the so-called Washington Consensus approach to development that we shall discuss shortly. The basic objection made by late-developing states, such as the countries of East Asia, to the Washington Consensus/Anglo-American idea “liberalize and then growth follows” was twofold. First, this understanding mistakes the outcomes of growth, stable public finances, low inflation, cost competitiveness, and so on, for the causes of growth. Second, the liberal path to growth only makes sense if you are an early developer, since you have no competitors— pace the United Kingdom in the eighteenth century and the United States in the nineteenth century. Yet in the contemporary world, development is almost always state led. Germany was in many ways the first country to prove this very point during the catch-up with Britain. But then, like the United States and the United Kingdom, Germany forgot her uniqueness, in terms of both timing and context and in terms of how building the export-led ordo that made Germany rich was only possible precisely because other countries were not doing the same at the same time. Now Germany and the EC want everyone else in Europe to be more German: another fallacy of composition that cannot work. As Martin Wolf put it beautifully, “Is everybody supposed to run current account surpluses? If so, with whom—Martians? And if everybody does indeed try to run a savings surplus, what else can be the outcome but a permanent global depression?” Germany was able to take the lead in Europe because German ideas have been at the heart of the EU and the euro since its inception. This is also why the Germans were able so successfully to turn the debate about the crisis their way—they were the only people who really believed what they were saying.
This was a longer and slightly more painful read for me back in the day, but I did enjoy reading it, especially as there was more talk about Greece’s economy and the austerity measures taken back then to reduce government expenditure and generate a current account surplus.
Related to the previous excerpt from Joe Studwell’s book, How Asia Works, this passage also reminds me of how western countries constantly tout liberalization of economies as the only path to growth. In that book, and from the real life examples of South Korea and China, the truth is much more nuanced and complicated than that.
Cause and effect are also often hard to determine. Was economic liberalization a result of economic growth, or was it a cause? I remember reading about both education levels and economic growth being correlated, but cause and effect is much harder to ascertain.
Back to the topic of austerity and surpluses, regardless of your stance on whether reducing a nation’s deficit is of importance, (Modern Monetary Theorists put less importance on this. I’ve got a upcoming post about it.), certainly forcing nations to cut down on their public spending during a time of crisis certainly puts a lot more stress and pressure on the average citizen of the country. It also becomes a moral decision, whether forcing austerity on a nation already in economic downturn can be fair on its citizens. Rationally, it also makes it harder to get to the path of recovery.
