Why the Berlin Consensus is Toxic for the EU

 August 31, 2015

Over the past fifteen years, quite a lot of criticism has been levelled by the “MIT gang”° against what has become known as the Washington consensus. Very little or no public discussion, however, has taken place about its close European offshoot, the Berlin consensus.

Sure, there are some differences between the neoliberal economic thinking underpinning the Washington consensus concept and the Berlin consensus. For better or for worse, the pitfalls in promoting mass privatizations, currency and capital markets liberalization around the globe are too well-known to all to insist upon here. What the Washington and the Berlin consensus have in common, on the other hand, is the “one-size-fits-all” approach to solving economic problems.

The policies shaping today’s Berlin consensus have appeared during the nineties in connection with the introduction of the common currency. The main tenets of the Berlin consensus are derived from the German economic doctrine of ordoliberalism and the project of Walther Funk, Hitler’s minister of the economy.

Alas, what works for Germany does not work for the rest of the eurozone. The Maastricht Treaty, the budgetary and public debt rules and limitations, as well as the accompanying austerity measures have been enshrined, following the sovereign debt and euro crises, into the constitutions of most eurozone member countries. The six-pack and the two-pack compacts have also become part of the financial legislation of the eurozone.

And here lies the problem. The rigidity or inflexibility of the rules and principles on which the Berlin consensus is based, whilst it might favour an export economy like Germany’s, is playing havoc with economies like France’s and Italy’s, to mention but a few. The German obsession with very low inflation, low wages and zero budget deficit targets has provoked the stagnation of most eurozone economies. In the normal order of things there are surplus countries and deficit countries, since it is not possible to transform the whole continent into a global exporting powerhouse. This is the main reason why imposing the Berlin consensus on all of the eurozone’s member states is proving not only wrong, but downright catastrophic.

Still, compliant governments from France to Greece have made huge efforts to cut government expenditure, freeze or diminish wages and transform their consumer-led economies into export champions. Some, like Portugal and Spain have temporarily succeeded in doing so, but only by repressing internal demand, cutting wages and tolerating high unemployment rates.

The German way, unfortunately, is that of adapting the economy to the needs of price stability, and not the currency to the needs of the economy. For German policymakers, the flexibility has to come from the workers, not from the rules governing the economy. The fact that the eurozone has ceased to work – following the imposition of the Berlin consensus – is by now clear for all to see.

As it always happens when the groupthink phenomenon manifests itself, however, EU leaders prefer to justify the unjustifiable and to delay needed changes in policy until it will be too late to save not only the common currency area, but the EU as a political union as well. (The Eurogroup is a textbook example of groupthink.)

Accordingly, it is time for knowledgeable insiders – such as Yanis Varoufakis, for example – to clearly and concisely explain to the European layman why the Berlin consensus is toxic for the eurozone and what can be done about it. Surely, one cannot expect such a demanding intellectual effort to be undertaken by the likes of Wolfgang Schaeuble, Jeroen Dijsselbloem or say… the German Council of Economists. And, who knows? A timely and well-written book on this subject might even become a best-seller here in Europe.

°Note: The “MIT gang” is a group of leading American and French economists, such as Paul Krugman, Ben Bernanke, Olivier Blanchard, Maurice Obstfeld, who have studied economics at MIT at about the same time and have continued to promote Keynesian macro-economic remedies, as opposed to supply-side economic remedies, in addressing economic downturns.