Let Law Rule: Ordoliberalism and Europe ’ s Economic Constitution

1. Let Law Rule: Ordoliberalism and Europe’s Economic Constitution Timo Miettinen, Ph.DThe Network for European Studies, UNIVERSITY OF HELSINKI

2. EURO CRISIS: NEW INTERESTS • Euro crisis: new interest in the theoretical, ideological, and historical foundations of the European economic model • Analysis of what went wrong rests on diverging economic and political premises • Differences in competitiveness vs. structural flaws • While the “euro crisis” itself has been constructed primarily as an economic problem, it has had wide repercussions to our ideas of democracy, state sovereignty, and social rights

3. ECONOMIC CONSTITUTION • In the research literature, questions concerning the European economic model are often discussed under the title of “economic constitution”. • Here, the concept of constitution refers not only to a basic legal framework but ideological and institutional solutions • In the case of the EMU, the concept answers the basic question as in what ways should economy be regulated on the European level, and to what extent should individual states give away their economic and political sovereignty.

4. Twotraditions of economicconstitution • The French tradition, often referred to as gouvernance économique(“economic governance”) or dirigisme, is most often defined in terms of active macroeconomic coordination: 1) institutionalization of fiscal coordination, the role of the state; 2) countercyclical policies; 3) regulation of the financial sector; 4) democratization of economic policy • The German tradition of ordoliberalism or Ordnungspolitik that focuses on law and executive institutions: 1) rule-based macroeconomic coordination; 2) strong executive institutions; 3) price stability; 4) central bank independence

5. EMU AND ORDOLIBERALISM • In the context of the EMU, the influence of ordoliberalism is present in at least three central components: • The Stability and Growth Pact (SGP) that focuses on fiscal discipline • The rejection of joint liability in the Treaties (e.g., Art. 123 & 125 TFEU – “no bail-out”) • The mandate of the European Central Bank that focuses on price stability

6. Triumph of ordoliberal ideas? • Crisis strenghtens ordoliberalism? • Executive institutions such as the European Commission and the European Central Bank have gained new competences and responsibilities • E.g., the so-called fiscal compact has strengthened the control and implementation of budget rules, and there has been little effort for the promotion of EU wide investment policies • European Semester as a new mechanism of control • German narrative: Common rules were broken – thus, the legal framework must be strengthened.

7. “For governments, this [question on how to act in a situation of crisis] is a very sensitive aspect of the “political economy” of decisions aiming at prevention in times of looming crisis. (…) As regards central banks, I would insist on the fact that their independence from governments and from political authorities – as well as from any pressure groups – is, in such circumstances, absolutely key to permitting them to take the appropriate preventive decisions. In sum, what I would call the apolitical economyof central banks’ decisions in these demanding times is more important than ever.” - Jean-Claude Trichet: “Central banking in uncertain times: conviction and responsibility”Macroeconomic challenges: the decade ahead, Jackson Hole, Wyoming, 27 August 2010

8. Ordoliberalism as thedominantframework • Basic argument: Economic constitution of the EMU reflects the ordoliberal idea that emphasizes pre-established rules over ad hoc deliberation and coordination • Depolitization of economic policy in the European Union • Habermas: ”executive federalism” • This can be explained partially through historical reasons • Germany as the historical model for EMU (SGP & ECB) • Rule-based framework and price stability benefits economies that are grounded on export-led growth • Ordoliberalism reflects a deeper vision which is highly cynical of politics itself and presents itself as a scientific, exact theory of ideal forms

9. Ordoliberalism and social market economy • Maastricht Treaty (1992): EU as ”an open market economy with free competition” (Article 3.) • Lisbon Treaty (2007): EU as “highly competitive social market economy” (Article 3.) • “Social market economy” (Soziale Marktwirtschaft) the dominant German model (promoted by Adenauer from 1949 onwards), coined by Alfred Müller-Armack in 1946. • Opposed to both socialism and laissez-faire capitalism • Background in the German tradition of ordoliberalism promoted by the so called Freiburg School of Economics (Walter Eucken, Franz Böhm, Hans Grossmann-Doerth, Leonhard Miksch)

10. neoliberalism? • Although ordoliberals were one of the first to use the concept of neoliberalism or “new liberalism”, their views differed from the more laissez-faire oriented versions of Austrian or (later) Chicago-based neoliberalism. • Free market economy, according to ordoliberals, could only function within a competitive environment that is sustained by a strong and effective legal framework – what both Eucken and Böhm called an “economic constitution” (Wirtschaftsverfassung). • Against Fascism, Socialism and Keynesianism: No central planning! • ”Total decision” (Gesamtentscheidung) as the fundamental, existential choice for market economy

11. Order as the fundamental problem • Market economy is not a natural phenomenon • Order (Ordnung) central for the establishment of market economy. • Economic order (Wirtschaftsordnung) refers to the overall institutional, legal and spiritual aspects of a particular economic system. • “Economic lifeworld” that is always given to its subjects in concrete experience. • Echoing the Medieval concept of ordo, an economic order is experienced by its subjects as normatively demanding • The task of scientific observation, however, was to grasp the question of economic order as a “universal problem”: what are “rules of the game” (Spielregeln).

12. “The problem will not solve itself simply by our letting economic systems grow up spontaneously. The history of the century has shown this plainly enough. The economic system has to be consciously shaped. The detailed problems of economic policy, trade policy, credit, monopoly, or tax policy, or of company or bankruptcy law, are part of the great problem of how the whole economy, national and international, and its rules, are to be shaped.” - Eucken: Foundations of Economics

13. IDEAL TYPE: EXCHANGE ECONOMY • All economic systems variations of two basic forms: centrally directed economy / exchange economy • EXCHANGE ECONOMY: Strong state which promotes and creates free competition in different areas of the society (against politics of interest groups) • Stable money, independent central bank, constancy of economic policy • Dismantling of monopolies • The openness of the market • Freedom of contract, respect for private property • Personal liability and responsibility of economic actors.

14. “The state should influence the forms of economy, but not itself direct the economic process. (...) State planning of forms: Yes! State planning and control of the economic process: No!” - Eucken: This Unsuccessful Age (1952)

15. ORDOLIBERAL VIEW OF POLITICS • Freedom is restricted by two instances: 1) Private power of producers; 2) Collective of the society  Power of the state • Cynical view of politics: Politics as an arena for different rent-seeking groups • Ordoliberal vision: politics without politics, favoring ”common rules”instead of collective decisions • Pre-established framework instead of ad hoc decisions

16. Three points on ordoliberalism • Economic system must be anchored in a strong political and legal basis (law and political institutions as rule-based instruments) • Free market economy as an ideal type: the normative model of best possible economic order as unchangeable and static • Ultimately, the sphere of economy as independent of politics and morality

17. “A lot of people have criticized countries like Finland or Germany or the Netherlands for being too tough. For me, as an avid pro-European it’s all about rules.” - Alexander Stubb: Interview for Wall Street Journal (August 14, 2015)

18. Thank you! timo.pa.miettinen@helsinki.fi