FIB Papers
Wissenschaftszentrum Berlin für Sozialforschung
Veröffentlichungsreihe der Forschungsgruppe Internationale Beziehungen
P 92-310
THE NEW GERMANY IN EUROPE:
AN EMERGING HEGEMON?
by Paulette Kurzer*
Professsor at Babson College, Massachusetts, USA
Publication Series o f the International Relations Research Group Reichpietschufer 50
ABSTRACT
This paper examines the impact o f the enlarged Federal Republic o f Germany on European politics. To investigate whether the FRG is becoming a hegemonic power, it analyzes Germany’s influence on the policy process o f Belgium and the Netherlands. The conclusion o f the paper is that a fear o f a ‘German Europe’ is misplaced. On the other hand, European countries (and Belgium and the Netherlands) have good reasons for questioning Germ any’s special role in the process of monetary integration. However, German dominance is limited and confined to monetary integration and has not spilled over into other areas.
ZUSAMMENFASSUNG
Dieser Beitrag untersucht die Rolle der vergrößerten Bundesrepublik Deutschland in der europäischen Politik. Um der Frage nachzugehen, ob sich Deutschland zur Hegemonialmacht entwickelt, wird sein Einfluß auf die Politik Belgiens und der Niederlanden untersucht. Der Beitrag kommt zu den Schluß, daß die Angst vor einem ‘deutschen Europa’ unberechtigt ist. Andererseits haben europäische Länder (sowie Belgien und die Niederlanden) gute Grunde, die Sonderrolle Deutschlands in der Finanzintegration in Frage zu stellen. Die Dominanz Deutschlands ist jedoch begrenzt; sie beschränkt sich auf die Finanzintegration und hat sich nicht auf andere Bereiche ausgedehnt.
Is unified Gennany poised to become a regional superpower, forcing others to toe its line and accept its norms and policies? The events o f the last few years have engendered fresh speculation on how the enlarged Germany will fit into Europe. Will the Bonn Republic be a strong pillar in the unifying European Community or does it seek to translate its economic prominence into political dominance?
This report examines the extent to which the FRG influences the direction o f the internal policy process in two small democracies — Belgium and the Netherlands. It will conclude that the fear o f a ‘German Europe’ is misplaced. But it is also argues against the image o f Germany as a benevolent model neighbor. Its capacity to determine monetary and therefore economic decisions in the Community justifies the latent resentment o f its neighbors and gives rise to worried questions as to the ultimate motives o f Germany. For the Europeans, a constant source o f anxiety is whether the self-interested policies o f Germany are also good for them. Despite the ambivalence about Germ any’s objectives and means, there is not enough evidence to suggest that Germany is becoming a hegemon or has the inclination to establish hegemony over its European neighbors.
Four reasons for this judgement are: 1) the Kohl government has badly misjudged the financial and emotional costs o f unification and the institutional resources necessary to integrate the five new Bundesländer 2) the fragmented formulation o f Germany’s EC policy obstructs a coherent targeted strategy towards Europe 3) because o f their specificity, German institutions do not travel well and are difficult to impose on or transfer to its neighboring countries 4) G erm any’s European partners are not anxious to emulate M odell D eutschland because they developed their own institutions which are compatible with the social market economy o f Germany.
In this report, I will not discuss the first point because I treat it elsewhere (Kurzer and Allen, 1992). Instead, the paper concentrates on analyzing the three other points, w ith special reference to Belgium and the Netherlands, and starts off with a brief survey o f the discussion regarding German hegemony. Next, Germany’s leadership in the European Community is discussed. In the second part of the paper, the focus shifts to monetary integration and G erm any’s special role in this process. I use Australia and Canada as counterpoints to explain why the Low Countries are not complaining bitterly about the loss o f their monetary and economic sovereignty, which has been the inevitable result o f German dominance in the European M onetary System.
German H egemony
Advocates o f the German hegemony thesis must be able to explicate why European countries would indeed submit to German leadership. Many institutions in postwar Europe—NATO and the European Community—were specifically designed to harness the energy o f the German people into export competitiveness and to anchor the thriving German economy in a Western framework.
With NATO and the European Economic Community containing German expansionism, German nationalism, which had threatened the precarious European order before World W ar n , disappeared and was replaced by the efforts to create a stable and competitive economy.
(Hanrieder, 1989). Since neither outright coercion by Germany nor benign self-interest among its European partners explain why other countries voluntarily cede to German leadership, the main question remains as to why other countries agree to be governed by M odell Deutschland.
Proponents o f the view o f growing German dominance claim that the very success o f the German economy prompts its trading partners to emulate the institutions o f social market economy.
(Markovitz and Reich, 1991). The trading partners wish to import a variant o f the social market economy, an economic system which combines economic liberalism with comprehensive social legislation, in order to participate in Germany’s economic success. Increased trade links and the conscious emulation o f German-style modes o f market intervention, so the argument goes, enable Germany to exert influence over other countries.
Proponents o f the view o f rising German hegemony point out that B onn’s willingness to finance the deficits in the EC budget helps deflect the worries or criticism o f other European countries.
Germany transferred close to one percent o f its GDP to the EC budget, and received in return about 0.5 percent o f GDP in agricultural subsidies (Ardy, 1988). Typically, a hegemon is able to pay the costs o f maintaining a system even when others violate the rules because the hegemon benefits from the system. Germany gains from the system because it is a competitive export economy and its market share in total intra-EC trade has risen steadily in the 1980s at the expense of, among others, the Netherlands and Belgium (Cameron, 1992:68).
Germany as a successful hegemonic power governs the life o f other countries through means other than brute power, open coercion, or blackmail. It is in no position to intimidate and bully small or large EC member-states. Instead, the ERG is able to draw on its prosperity to provide a superior model o f economic management and societal relations. Other countries are irresistibly attracted to the economic success story and try to match German economic performance by
assimilating its organizational features and by forming close economic links with the FRG. In the process, Bonn commands tremendous respect and influence in W estern Europe. Since, furthermore, the operation o f the EC is liberally financed with German contributions, the FRG can at the minimum block proposals and perhaps shape the EC agenda to its liking.
Does this amount to a confirmation o f German hegemony? Do trade relations spill over into other spheres and do they result in hegemony? Do European countries seek to match German success by copying the German way o f managing market relations, politics, and labor? I will turn to these questions next.
The European Community and Germany
Only in one o f the many successful and not so successful Community initiatives does Germany provide leadership. This is the field o f monetary integration and joint management o f exchange rate policy. Besides the European Monetary System (EMS), developments in the Community do not confirm the thesis o f Germany hegemony. Political bargaining in the EC often precludes unilateral imposition o f preferences and the most momentous examples o f the European integration process, the Single European Act, was the product o f complex layers of negotiations between business and national governments, and among the head o f states o f the EC, at the same time reflecting profound changes in domestic and global economies (Colchester & Buchan, 1990;
Sandholz and Zysman, 1989; Moravcsik, 1991). The Single European A ct came together as the Commission under President Jacques Delors widened its activities and energetically lobbied for a joint effort to relaunch Europe against the competitive innovations o f Japan and the US, as the Court o f Justice in many cases ruled favorably to broadening the process o f liberalization, and as conservative governments throughout Europe strove to create a more conducive business climate. The internal market project or ‘1992’ was the end product o f numerous political, economic, and institutional processes. Germany did not play a special role and was not instrumental in the drafting o f the White Paper which preceded the ratification o f the Single European Act.
Accounts o f policy making deliberations in the German federal government supply additional evidence that convincingly shows how Germany is prevented from establishing itself as the critical player. State agencies in the federal administration often act separately from each other and sometimes at cross-purposes. A good example o f this is German policy towards the common agricultural program (CAP). W hile the Chancellor’s office strives to reform CAP funding to
reduce Germany’s contribution to the EC budget, the minister o f agriculture blocks reforms out o f fear o f offending German farmers and their powerful interest group organizations. German European policy is driven by competing interests and government agencies in ways that undermine the formulating o f an aggressive and determined foreign policy. EC policy is framed in individual German ministries in a highly specialized manner using regular bureaucratic procedures. Coherent positions towards EC proposals emerge later as a result of intra-governmental bargaining between clashing government ministries with links to different interest groups and various levels o f government action (Land or federal) (Bulmer and Paterson, 1987; Colchester and Buchan, 1990:32). Internal contradictions and external constraints in the formulation o f German EC policy make sure that the German federal government cannot impose its agenda or priorities over other national governments. German federalism in which the Länder governments are responsible for a whole battery o f policy areas now under the competence of the EC also hinders the rise o f a powerful Germany. Competition between the Länder and friction between federal government and Bundesrat occasionally inhibit the FRG from acting promptly and coherently, and lead to accusations that the Germans interfere with progress in European integration. Many countries expect Germany to fulfill a leadership role and fault the German government for not doing so. There is therefore rich irony in the claim that Germans are trying to Germanize Europe. Many Europeans have felt in the past that Germans do not play a sufficiently prominent role in the EC. (Wallace, 1988).
This does not invalidate the fact that Germany has consistently benefitted from intra-Community trade throughout the 1980s, increasing its share o f total intra-EC exports by three points to nearly 28 percent and running a surplus of fifty billion dollars in 1989. Only the Netherlands, w ith a 15 billion dollar surplus, but with a declining share o f total intra-EC exports, equals G erm any’s surplus EC trade balance. This does not mean that Germany is becoming a regional hegemon but rather that it is a major beneficiary o f trade liberalization and that it is more than willing to finance the maintenance o f the system because it is the main beneficiary. Quite simply, the country which pays the most can extract the largest number o f concessions. Simple bargaining arithmetic produces this outcome. It has little bearing on hegemony.
With one exception, Germany is nothing more than the wealthiest member in a club o f rich European democracies. The exception is the European Monetary System. German authorities undoubtedly dominate and dictate the rules o f monetary integration although here, too, it is difficult to speak o f the pursuit of a coherent national interest.
In the late 1970s, the German leadership was deeply split over the desirability o f the EMS.
Chancellor Helmut Schmidt was totally committed to further European integration by promoting monetary cooperation and launched an internal discussion on the construction o f the European Monetary System. But the Bundesbank was strongly opposed to ceding any o f its authority to a supranational organization. The central bank feared that in the absence o f larger economic convergence in the Community Germany would be paying for the inflationary policies o f other countries. Although the EMS was the brainchild o f Schmidt and represented the first major act o f German leadership in the history o f the EC, the German financial establishment vehemently objected to its adoption (Ludlow, 1982:290). Reproaching its own government, Bundesbank president, Emminger, announced in 1979 that the central bank might refuse to obey EM S rules if these ever jeopardized its goal of price stability (Goodman, 1992:191). It is therefore difficult to conclude that Germany intended to become the dominant actor in the EMS. No one, least of all the Bundesbank, foresaw this when the EMS was created. Part o f the reason for its prominent position in the EM S stems from the fact that conservative political parties and business groups in other countries encouraged German monetary authorities to take over the leadership o f the EMS to combat inflation at home. Thus, the acceptance o f rigid monetary framework and the subsequent disinflationary outcomes in the 1980s were as much the product o f DM superiority in the EMS as the result o f the individual choice o f coalition governments in neighboring countries. In Belgium and the Netherlands, neo-liberal reformers welcomed the constraints arising from anti-inflation rules, inspired by German commitment to price stability, and used the obligations to maintain price and exchange rate stability to cut down budget spending and transform the wage bargaining system. But these countries have not adopted M odell Deutschland to improve export competitiveness or win market shares or spur economic growth.
It is worth repeating that the privileges of Germany in the EMS are in the end short-lived because the formation o f a European central bank (ECB) is bound to do away with the leverage of Bundesbank officials over the activities o f other central banks. For one, although the constitutional obligations and operation o f ECB, with its emphasis on ‘adequate institutional autonomy’ and
‘price stability’ imitates the German Bundesbank to the dot, the EM U is nonetheless a fairer system o f setting interest rate policy. Under the EMS regime, the Bundesbank is Europe’s de facto central bank and other countries are given literally a couple o f minutes to react to the Bundesbank’s lowering or raising o f its discount rates. Under EM U and ECB, each o f the twelve central banks is formally engaged in the management o f monetary and interest rate policy.
Progress towards economic and monetary union will undoubtedly slow down in the wake o f the negative feelings among many voters in most EC countries but Europe will eventually have a single currency, common fiscal authorities, and one political system. In a unified Europe, Germany will still be a very important ‘region’ but it is not clear whether it desires or is capable o f being the leading country.
German Influence in the EMS
One area in which Germany undoubtedly constrains Belgian and Dutch policy making is exchange rate policy. Domestic policy officials no longer decide on monetary policy whose instruments encompass interest rate setting and exchange rate realignments. This has ramifications for national economic policy making. If the parameters o f monetary policy are determined by external forces, many facets o f macro-economic policy making are also determined by exogenous developments. Because the Germans lead the developments inside the EMS they determine the monetary policy o f participating countries. However, German dominance in the EMS should not be confused with German hegemony. Although many components o f economic steering must eventually adapt to the European-wide monetary framework, other policy areas remain untouched. Labor relations, industrial policy, cultural affairs, education and health, for example, have undergone changes in Belgium and the Netherlands but not in response to monetary integration under the leadership o f the Bundesbank.
Moreover, German influence in the EMS is tolerated by other countries because they seek to establish credentials as being conscious o f the need for price stability. W ere it not for conservative or neo-liberal government coalitions in other countries, German leadership in the EMS would have been shorn o f its meaning some time ago.
The EMS, launched in 1979 to create a zone o f monetary stability in Europe, stipulated highly complex intervention mechanisms to manage intra-European exchange rates. Changes in the central or bilateral rates required the consent of all participants because exchange realignments affected other currencies as well through the use o f the ECU. The latter is a composite monetary
basket that would serve the EMS settlement process as a numeraire, reserve asset, and means of settlement. The EMS provided credit support to members for balance o f payments difficulties (Ypersele, 1979).
The importance o f the EMS for countries like Belgium and the Netherlands, which joined immediately, is that the commitment to fixed though adjustable exchange rates required agreements on commonly acceptable sets o f economic targets. Under German prodding, EC leaders selected price stability as an important target and agreed to submit to a rigorous anti-inflation framework. The procedures o f the EMS, which were less onerous for low inflation countries than high inflation countries, have been especially difficult for social democratic governments. Interest rate setting and budget spending programs spill over into the balance of payments and accumulate current account deficits. If the currency moves against its agreed margins, the authorities must either shelve their expansionary programs or call for an exchange rate realignment. Since the approval o f a request for an exchange rate realignment compels the country requesting a devaluation to implement a package o f austerity measures, leftwing governments cannot escape the deflationary trap (Goodman, 1992:197-200; Kurzer, 1993).
Most analysts agree that the technical workings o f the EMS impose asymmetric costs on its participating countries. The EMS is dominated by the German Bundesbank, which limits the policy choices available to other countries and functions as a disciplinary device on high-inflation countries. According to this view, membership in the EMS means surrendering national monetary policy autonomy to the Bundesbank, with the DM playing a central, hegemonic role (Giavazzi and Giovannini, 1987; Russo and Tullio, 1988). Because o f the DM role as an anchor currency, weaker economies with higher price instability must bring inflation down through coercive income policies and fiscal spending retrenchments. But the leading country does not provide the others with a growth stimulus (McDonald and Zis, 1989; Ungerer, 1989:238).
During the negotiations on creating an island o f monetary stability in Europe in 1978, the Germans were adamant that the intervention mechanism should be based on a bilateral parity grid rather than on ECU parities. Such an arrangement ensured that the pressure to adjust would be on the w eak currencies. Central banks in the countries with weak currencies would have to draw down foreign currency reserves to defend the central exchange rate. Having finite reserves, weak currency countries would request after a while an exchange rate realignment to devalue their
currencies. But the Bundesbank stipulated that when a country requested a devaluation it also present a companion package o f deflationary measures to make sure that the exchange rate realignment would not simply translate into higher inflation.
It is possible to avoid a devaluation but countries with inflationary economic policies would then have to fight off speculation against their currency by raising interest rates. High interest rates defeat the purpose o f stimulating investments and creating jobs (Mastropasqua, Micossi, et.al.
1988:283; Wyplosz, 1989). In the long run, a sounder alternative is to bring down inflation. We see therefore a large measure o f inflation convergence in the EMS area.
Since countries can no longer monetize public expenditures, they go into debt. To induce savers to hold government bonds, there will be a strong urge to maintain interest rates aligned to German rates. Setting one’s interest rates according to German levels will force governments to control public spending as much as possible to guard against sudden unexpected interest rate increases.
Debt payments will grow or shrink with the interest rates set by the German Bundesbank, and any prudent government will want to be careful about budget spending programs (de Cecco, 1989; Tsoukalis, 1989).
Not even expansionary budgetary policies in Germany are a solution to the deflationary biases in the design o f the EMS. After German unification, in 1991, the budget deficit o f the federal government widened considerably and was equal to around 6 percent o f GDP. It forced the Bundesbank, Europe’s most independent central bank, to push interest rates to their highest level since 1945. Other countries followed and German high interest rates needlessly depressed economic growth in the rest o f Europe. Although everybody complained, including Chancellor Kohl, nobody has the moral or legal authority to alter the course o f the Bundesbank. For other countries, ignoring German interest rate levels spurs enormous capital outflows leads to current account deficits, and possibly, entails a devaluation in the long run. Other countries have no choice but to follow the interest rate levels o f the German Bundesbank.
Although there is little doubt that the EMS is dominated by the German monetary authorities, central banks in countries with weak currencies and high inflation do not necessarily resist the dominance o f the Bundesbank; they accept the asymmetry in order to import credibility for their own anti-inflation program and to persuade governments to curb their spending programs (Woolley, 1992). In particular, rightist governments have been more likely to embrace the discipline imposed by the EMS on spending habits than leftwing governments. In both the
Netherlands and Belgium, elections in the early 1980s brought to power center-right coalition cabinets which had run electoral campaigns on the promise o f slimming down the public sector, bolstering the profits o f private enterprises, and slowing down labor costs and inflation.
Belgium and the Netherlands in the EMS
In Belgium, recurrent speculation against the Belgian franc in 1979-1982, fed by enormous budget and current account deficits, convinced the monetary authorities to request a devaluation.
A t a meeting o f the ministers o f finance and central bank governors o f EC member-states, the Belgians requested a 12 percent devaluation. This was rejected by the Germans as too steep and changed into an 8 percent devaluation. In return, the Germans also insisted on a government program o f cutting the budget and abolishing wage indexation to the cost o f living. The Belgian delegation acquiesced readily because they had contemplated such an austerity package for several years but had been rebuffed by organized labor, parliamentary factions aligned with organized labor, and electoral considerations (Smits, 1983).
In the late 1980s, with the prospects o f economic and monetary union, the Belgian parliament passed new legislation to redefine the statutory power o f the central bank in 1990. Because of the ongoing need to coordinate and consult on monetary decisions, the central bank needed greater latitude or independence from political supervision to determine domestic credit and financial objectives. The new legislation allowed the Belgian National Bank to engage in spot sales and purchases o f foreign currencies (currency swaps) and to sell its gold reserves without seeking the government’s permission. Similarly, the Banking Commission, once a fairly weak body, was renamed the Banking and Finance Commission and given broader responsibilities to break stock exchange monopolies, renegotiate commissions for stockbroking firms, and issue new rules on capital adequacy and market structure (OECD, 1989:74-78; Kredietbank, 1990). Other financial reforms have been geared to easing the financial burdens o f the Treasury, which now permits both foreign and non-financial companies to bid on Treasury papers during regular auctions. The new subscription rules, inviting more competitive bidding, are primarily meant to lower the cost o f government borrowing. The restructuring o f the financial system will break the monopoly of Belgian banks on state financing and lower the costs for the government (Economist Intelligence Unit, 1991).
German influence has also had its positive aspects, enabling the Belgian government to reduce its debt servicing costs and to minimize volatile currency flows. German hegemony in the EMS is therefore partially based on a concurrence o f interests between neo-liberal reformers and the German Bundesbank. Politicians who aimed at shrinking Belgium ’s public sector obtained extra support from the disciplinary straight]'acket produced by the EMS.
A convergence o f interests is even more striking between the monetary authorities o f the Netherlands and Germany. In the Netherlands, the most pressing issue during the preliminary negotiations on the EMS in 1978 was on how to interpret the provisions and stages outlined by the much earlier 1970 W erner Report on monetary and economic union. The question rose whether a common currency policy was at all feasible without wide ranging harmonization of fiscal and economic policy. For the Germans and the Dutch, the answer was that strict economic and budgetary guidelines and binding stabilization programs should precede monetary integration. If not, they claimed, countries with a strong currency like the Federal Republic and the Netherlands would be in danger o f importing the inflationary tendencies of the weaker economies or currencies. W eak currency countries like Belgium and France, for identical reasons, argued for a quick monetary union because that would automatically spur policy coordination and economic harmonization. The costs o f adjustments would then be shared among weak and strong currency countries. The Germans and Dutch won this debate.
In general, the Netherlands has not allowed itself any monetary autonomy and voluntarily sets its short and long-term interest rates according to rates in Germany (Smeets, 1990). This policy is not always unanimously supported. For example, in the fall o f 1989, the central bank raised the interest rate by one percent following a similar increase by the German central bank. The Dutch finance minister criticized the decision because o f the persistently high unemployment in the Netherlands; a more expansionary budget policy would likely have led to job creation (van der Ploeg, 1989). In response to such criticism, the monetary authorities need only remind the Dutch o f their dependence on G erm any-27 percent o f its trade is with the Federal R epublic-and that deviation from German monetary policy leads to inflation, loss o f faith in the guilder, higher interest rates and a deteriorating balance o f payments. Although central banks admit that a slight depreciation of the guilder vis-ä-vis the German mark would stimulate exports, the long-term effects are rising import prices and an overall worsening of export competitiveness. Shadowing
the German mark also allows the monetary authorities to keep interest rates as low as possible to stimulate economic growth and diminish the burden o f interest payments on the budget deficit (Rood, 1990:21).
The EM S emphasis on disinflation and stable exchange rates conforms with some o f the most deeply-held convictions o f Dutch state officials. In fact, during the interwar period, Dutch economists and state officials published academic tracts on monetary theory, moderate monetarism, that was later implemented by the first postwar president (Holtrop) o f the central bank (Fase, 1987). The theory was fully congruent with the aims o f the EMS, and the main policy tool was infrequent and microscopic external adjustments and stable internal prices and costs.
The Netherlands Bank never attempted to issue money growth targets and has always argued that in addition to money creation, other aspects o f the economic process, such as wage formation and budgetary deficits, are o f equal importance for the realization o f a balanced and effective policy. Exchange rates themselves have never been utilized to strengthen or recover cost competitiveness before or after Bretton Woods. Nonetheless, according to official Dutch statements, it is extremely advantageous for the Netherlands to revoke any pretense o f monetary policy independence (Kessler, 1987:458).
Dutch companies are important global investors and a stable guilder lends support to their strategy o f global diversification. Its net creditor position was 26 percent o f GDP in 1989 and the outflow o f foreign direct investments in 1990 represented 4 1/2 percent o f GDP or nearly 22 billion guilders (OECD, 1991:31). The general consensus among monetary officials and elected politicians is that the value o f the guilder should not be subject to unpredictable movements. The best w ay to achieve that is to link it to the German mark. M onetary subordination to the German m ark is a conscious choice o f the Netherlands and appreciated by other actors in the economic policy-making process. It is difficult to attribute the subservience o f Dutch monetary policy and economic steering to that o f German hegemony. This is not to say that the activities o f the Dutch and Belgians do not enhance the economic weight o f Germany in the EMS. They do but they also enhance the power or weight o f certain coalitions inside these countries. A t the sam e time, the w ider ramifications o f EMS membership are limited to macro-economic policy. There is little to suggest that EMS or extensive trade relations triggered domestic reforms to remold national institutions along the lines o f M odell Deutschland.
Permanence o f National Institutions
Germany is the largest import market for the Low Countries. Both countries export approximately 20 to 30 percent o f their GDP (gross domestic product) to the FRG (see Table 1).
Table 1: Measures o f Trade Dependence
Export Ratio Main Trading Partner Main Export Commodity (% o f GDP) (% merchandise exports) (% merchandise exports) BEL 60 France (20) FRG (19) autos and parts (14)
non-ferro mineral (9)
NEL 58 FRG (30) food (20)
chemicals (18)
AUS 16 Japan (27) agriculture (40)
fuels (20)
CAN 25 US (75) autos and parts (23)
non-organic minerals & metals (13) Source: Europa World Yearbook (London: Europa Publications Ltd, 1991).
Once we take into account that they also export low value-added goods like food and minerals while they import capital goods and high quality luxury products, their degree o f economic independence is surely narrow. In spite o f this, it would be misleading to portray the economic link between FRG and the Low Countries as pseudo-imperialistic. In terms o f social or political developments, the small W est European countries have retained their own set o f national institutions and have not adopted specific German values or a German way o f life. Trade dependence seemed largely to be confined to the economic area and has not had any direct, observable repercussions on a wide range o f social institutions and political practices.
Although one o f the hallmarks o f a hegemon is that other countries quietly imitate norms and institutions of the leading country, Germany’s European partners in spite o f their awe o f M odell Deutschland, have not rushed to import the German-style industrial relations system, social welfare programs, business-government interaction, or capital markets.
Developments in the 1980s prove this point. Center-right coalition governments in Belgium and the Netherlands brought about many policy changes in the 1980s by attacking the postwar institutions such as centralized wage bargaining or economic redistributive programs and exploited the decline in legitimacy o f government intervention in social and industrial relations areas to press for another system o f managing industrial relations, wage negotiations, and transfer payments (Hancke, 1991; Spineux, 1990; Visser, 1990). In the absence o f coherent and equitable income policies, open social and political conflicts became more prominent in the 1980s. Yet greater discord in the 1980s does not square well with the notion that small countries have gradually adopted German-style modes o f market steering and social policy intervention. Rather, their criticism o f and action against the ‘postwar accords’ were more intense than K ohl’s proposals for a ‘W ende’ after 1982. The CDU/FDP administration continued to uphold the system of consensual, incremental steps to change the direction o f selected policy measures.
On the other hand, prominent aspects o f the German social market economy have been part and parcel o f the policy apparatus and thinking among Belgian and Dutch officials since 1945. For example, in terms o f social protection and economic liberalism, hallmarks o f the German model, Belgian and Dutch postwar governments subscribed to a comparable philosophy o f social solidarity and free trade. After W orld W ar H, business, labor, and government ushered in a period o f corporatist interest mediation whereby the three partners determined industrial and social issues at national venues. Business groups in both countries also assumed a degree of responsibility for distributing the fruits o f economic growth and creating an equitable society (Bulck, 1992; Daalder, 1989; Kurzer, 1993).
One could say that the Netherlands has gone further in cushioning weaker groups against the fluctuations of the world economy because the Dutch welfare state is more generous and comprehensive than the German one. If anything, for the Dutch, a superior version o f their own social welfare state is presented by Sweden, not Germany. Labor market policies in Sweden were always meant to prevent open unemployment while those o f the Netherlands, Belgium, and Germany were reliant on transfer payments to protect unemployed and unemployable workers from economic hardship. In each o f the three countries, market intervention stopped short of guaranteeing full employment.
A t the sam e time, because o f their strong export specialization, Belgium and the Netherlands also endorsed unconditionally global trade liberalization and sought to ensure economic liberalization inside the EC. Frequently, the Dutch sided with the Germans against the French to keep economic frontiers in and outside the Community open. Economic liberalism and social solidarity also mark the period o f rapid growth in Belgium and the Netherlands, and German policy orientation and values are largely congruent with the experiences o f the Low Countries.
Germany does not present a compelling alternative vision o f market steering, social justice, or international competitiveness. When economic growth slowed down and industrial restructuring o f the world market produced high unemployment and growing budget deficits, government officials in the Low Countries sought neo-liberal solutions, first advocated across the Channel and Atlantic, by emphasizing private entrepreneurial initiatives, greater labor market flexibility, lower corporate taxes, and reduced public expenditures. The role model, here, was not so much Germany as it was Thatcher’s Britain and R eagan’s America.
Taking the events o f the last decade as a predictor o f future trends, fears o f the extensive Germanization o f Europe are ungrounded. A t least, these two countries are relatively confident that they can cope with the potentially disruptive impact o f Germany on their national identity.
They suffer from the ‘small state’ syndrome in that they are suspicious o f their large neighbor but their complaints against Germany are, all in all, muted (Lademacher, 1991).
I will briefly contrast Belgium and the Netherlands with Australia and Canada to shed further light on the relationship between large economies and small countries in the OECD-area. As will be explained, there exist important differences between old and new nations resulting in qualitatively different forms o f dependency. In terms o f population and output, Australia and Canada are small states. But public officials and ordinary citizens in the last two countries complain a lot more about their dependence on Japan/Britain and the US respectively than Belgium or the Netherlands about their dependence on Germany.
There are, however, historic and political justifications for Australia’s and Canada’s different perceptions and greater degree of distrust. A comparison between the two pairs o f countries will explain why Belgium and the Netherlands are more at ease with their proximity to Germany than Australia and Canada with their connections to Japan or the US.
Old and New Nations
For advanced industrialized states, Canada and Australia evolved a peculiar economic structure in that natural resources dominate. The exploitation o f natural resources (agriculture, minerals, furs) began in the colonial era when both were part o f the British dominion. Because o f the scarcity o f labor and capital Australia and Canada had historically much higher rates o f foreign capital penetration, amounting to 40 to 50 percent o f gross domestic capital formation before W W I but after they had gained statehood. After W W I, financial crises and economic depressions undermined the export earnings o f both countries and created difficulties with servicing the foreign debt. A struggle unfolded between local producers and foreign creditors for control over export commodities which the latter usually won. This led to a continuous squeeze on national producers, who were unable to compete against foreign investors and utilized nationalistic rhetoric o f dependency to provoke rising resentment among the local population and force governments to act against foreign powers. State officials and business leaders accused foreigners o f trying to take over the country and used this argument to justify the erection o f trade tariffs and foreign ownership barriers during the Great Depression and until the 1960s.
The unusual high ratio o f foreign direct investments reflected the prominence o f natural resources (fuel and minerals) and agriculture in the countries’ export structures. As dominions o f the British empire, the white settler colonies were established in semi-temperate lands, sparsely inhabited by native peoples who were forcibly displaced by large scale European immigration. Most of their exports were generated in the primary sector while industrialization was largely confined to processing o f primary products or import substitution, sheltered by protective measures and catering mainly to the domestic market. Non-resident transnational corporations dominated mineral and manufacturing industries from the beginning as the domestic market could not marshall the capital and skills to open up profitable export sectors (Crouch and Wheelwright,
1982; Schwartz, 1989).
More importantly, the presence o f foreign capital undermined the national confidence o f the new immigrant societies. Business and the political leadership in Australia and Canada were not able to cope psychologically with the economic and political dependence on foreign capital. By contrast, Belgium and the Netherlands were old, established nations whose institutions and culture predated industrialization and growing economic interaction with a unified German empire after 1870. With their own languages and traditions, the Belgians and Dutch had little to fear from
their close economic connections with Germany because it was highly unlikely that recurrent interaction with a larger German nation could undermine the cultural identity o f either. Moreover, industrial manufacturing and agriculture, which had been modernized towards the end o f the 19th century, drew upon domestic savings, the newly skilled labor force, and modest state assistance. Foreign capital, whether German or not, was o f no importance in the late 19th century.
By comparison, speaking the same language and having gained national sovereignty relatively recently, Canadians and Australians were more easily drawn into the cultural and political spheres o f the dominant British and later American economies. By contrast, Belgium and Netherlands were themselves colonial powers with widespread foreign investments. They constituted core areas o f the world economy despite their small size while Canada and Australia, covering immensely large territories, belonged to the periphery.
As peripheral nations, Australia and Canada relied on protectionism to defend local producers from international competition. In the 1960s, state policy in Canada and Australia moved away from protectionism to joint-ventures or co-ownership with foreign multinational corporations and around 40 percent o f Australian and 50 percent o f Canadian manufacturing is today under foreign control (David and W heelwright, 1990).
According to a 1978 UN study, Canada was ranked second, after Nigeria, as the country with the highest foreign-ownership level. Belgium was ranked number ten (UN, 1978). In 1983, Canada with 0.5 percent o f the w orld’s people received nearly 17 percent o f all global foreign direct investments (UN, 1983:34). O f course, what worries the Canadians m ost is that their large neighbor, the US, is the primary investor in Canada accounting for 72 percent o f the assets and 88 percent o f the profits in the foreign-owned sectors in the mid-1980s.
Canada’s relations with the US are, not surprisingly, a source o f constant controversy (Levitt, 1970). In the debates on the Free Trade Agreement (ratified in 1988), the anti-free trade campaign pointed out that further integration into the North American economy goes to the heart o f the question o f what it means to be Canadian. Closer economic integration with the US, according to this line o f reasoning, means choosing American power and its value system. Those values represent pure classical liberalism in which the market place is the only arbiter o f social values, the power o f big business is unrestricted and the principle o f extreme individualism are paramount.
Canadians desire, argues the anti-free trade bloc, a more peaceful and ordered society and tolerate a greater use o f government and public institutions to compensate for the economic or social
shortcomings o f pure capitalism. For many ordinary Canadians, and not only articulate insiders, foreign investments and Continentalism (integration into the North American economy) makes Canada richer but also less Canadian. As recently as 1986, a Gallup poll revealed that 36 percent o f the surveyed Canadians agreed that Canada should buy back the economy even if it means a big reduction in living standards; 50 percent were opposed (Laxer, 1989:4). By comparison, German postwar reconstruction followed the path also prevalent in other Continental European countries in that laissez-faire and unrestrained market competition were rejected in favor of government intervention in the social sphere to produce incentives conducive to consensual labor-business bargaining.
To conclude, foreign financing o f national government budgets and international financing of natural resources and industrialization took place in Australia and Canada at the time when state institutions and society were still being formed. Although Belgium also has a large num ber of non-resident multinational corporations, their arrival coincided with the formation o f the European Common Market in the 1960s and after Belgian holding companies controlled large swaths o f manufacturing, transportation, energy, and financial services. To be sure, foreign capital played no role in Belgium ’s industrialization in the 19th century. Similarly, the mechanization o f agriculture and introduction o f dairy farming in the Netherlands was an autonomous process and financed through domestic savings. Dutch multinational corporations began as colonial enterprises in Dutch East-India (Indonesia) and continued to invest abroad after World War II.
This contrasts sharply with the colonial bonds between Britain and the two Commonwealth nations, Australia and Canada, and with the continuous penetration o f international capital in the resource-based economies o f the two countries. Moreover, the ideological and political gap between Germany and the rest o f Continental Europe is not as stark as the schism between Europeanized Canada and super individualistic America or between Japan and Australia. Very likely, European countries feel less threatened by the accumulation o f wealth and power in the hands o f Germany than Canada and Australia feel about similar trends among their closest economic partners, namely the US and Japan.
Conclusion
It is too early to tell whether Germany is becoming a rising hegemonic power or not. Generally, the evidence for the view o f assertive dominance is weak. In the monetary sphere, Germany is the leading country although financial groups and monetary officials in Belgium and the Netherlands courted German dominance to combat inflation and push through budgetary and economic reforms at home. For neo-liberal reformers in Belgium and the Netherlands, the constraints associated with EMS participation are able to block further expansion o f the public sector and moderate wage increases. Thus, some domestic groups invite association with Germany to constrain competing domestic interests from restructuring the welfare state or labor relations along social democratic or Keynesian lines.
A further consideration is that the European central bank, which contains a strong resemblance to the Bundesbank, would nonetheless dilute the hold o f the Bundesbank on Europe’s monetary policy. The abolishment o f German mark, which is now questioned by a substantial minority of German citizens, would end the brief era o f German hegemony in monetary policies. Economic and monetary union as outlined in the Maastricht Treaty is bound to weaken the influence o f a single central bank and is therefore not much liked by the Bundesbank.
On a broader level, I will mention several other developments which limit Germany’s aspiration for leadership in Europe.
1. The Kohl administration miscalculated the financial and emotional costs o f absorbing the five new Länder into the FRG. A t this point, the Germans are preoccupied with unemployment, the surge o f racist attacks on foreigners, the uncertain economic future, and the sheer logistics of minimizing the dislocation o f unification in the East. Among all these challenges, the internal market project is certainly the least urgent one. CDU politicians face a difficult struggle in trying to survive a strong electoral backlash while an increasing number o f Germans question the main objectives o f the Treaty o f Maastricht.
2. Progress in European integration, moreover, demands from Germany and other countries reforms that challenge their own peculiar system o f organized capitalism. Very likely, deepening financial integration and the removal o f barriers on goods, capital, and labor will also usher in dramatic changes in the German model. Accordingly, Germany as well as other EC member-states
will have to search for new macro-economic frameworks and policy measures which will in all likelihood display increasing convergences as European countries cope with similar pressures and constraints.
3. National institutions do not travel well. Neighboring countries, assuming that they are impressed by the tremendous economic potential o f Germany, cannot simply imitate German organized capitalism. W est European countries have their own traditions, experiences, and context in which the welfare state and economic institutions evolved. It is just about impossible to conceive o f a situation where Belgium and the Netherlands are willing or able to emulate German business-government relations, labor market dynamics, immigration policy and so forth.
Although many institutions in the industrial relations system have altered in Europe, the new directions reflect changed balance o f power between labor and business, declining economic growth rates, the rise o f a new generation o f politicians with neo-liberal leanings, and deepening financial and economic integration. None o f these trends is directly attributable to German power or influence. Changes do not necessarily mean that industrial relations or public health care become more German-oriented. Parallel efforts to shrink the public sector have led to privatization and budget reductions everywhere in Europe. But the Germans do not lead this trend and other European countries are not becoming more Germanized in the course o f cutting back social expenditures.
4. It is important to note that the organization o f economic and social life in the smaller European countries do not dramatically diverge from the essential mix o f economic liberalism and social protection which epitomizes the German model. To a large extent, Belgium and the Netherlands share most of postwar G erm any’s treasured goals. This convergence o f outlook and preference did not take place because o f tight-knit economic interaction with Germany resulting in the gradual assimilation o f German norms and institutions. Rather, economic reconstruction and the diffusion o f Keynesian ideas influenced policy-making instruments and goals throughout W estern Europe. Since the Low Countries possess their own tradition and a firm national identity, they are much more confident and capable in succeeding to preserve their own culture and society against the pressures o f European integration than newer, less confident countries like Australia and Canada.
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