Criticising Germany: Three principles for the fair assessment of proud nations

A critical assessment of Germany's stance during the Euro Crisis is clearly called for. The trick is to produce it without falling prey to generalisations that are both politically odious and analytically misleading. By Yanis Varoufakis.

Generalising is the first step toward racism. Every sentence beginning with “The Germans believe this” or “The Greeks do that” is an initial slide on a slippery slope leading, eventually, to bigotry. As I have argued before, there is no such thing as the Germans, or the Brits, or the Greeks for that matter. Our various nations sport as much variety within them as the divergence that we observe between them. Moreover, there is no such thing as the ‘representative’ German, Greek or American. The fact that groups, and naturally nations, are subject to social norms that generate patterned behaviour and mindsets does not annul this point. As long as some gallant Germans fought the Nazis and died in Auschwitz, the claim that ‘the Germans’ are prone to, or responsible for, Nazism is absurd. Similarly, the fact that tax evasion and corruption is prevalent in Greece is no excuse for loose talk about ‘the tax-evading and corrupt Greeks’. Does this, however, mean that one cannot articulate a legitimate critique of Germany, of Greece, of nations in general? In recent months, following the rampant Euro Crisis, much criticism has been piled on Germany. A lot of it (just like its equivalent directed against Greece, Italy etc.) is misplaced and downright offensive, even if founded on many discrete truths (all big lies are so founded). Then again, it is impossible to come to terms with the Euro Crisis’s persistence and evolution unless Germany’s position is critically assessed. So, what are the limits of rational and fair criticism? This is the question I wish to tackle below by offering three principles of fair and useful criticism.

I begin by putting under the microscope my last statement, namely that Germany’s position needs to be critically assessed. What or, more pertinently, who is Germany? I have already claimed that there is no such thing as “the Germans”. But Germany? Surely there is a Germany. First, there is the country itself, as a bounded geography containing people, institutions, economies, governments etc. Then there is a language, a culture, national myths, customs etc. Of course, these constituent parts cannot be, in toto, the subject of the critical assessment that I claimed to be important in our quest for clues on the Euro Crisis’s nature. Clearly, we need a more focused answer to the question: “What is Germany and how can its role before and during the Crisis be assessed?”

One possibility is that, when investigating ‘Germany’s demeanour’, we simply refer to its government, indeed to the trio of German notables made up by the Chancellor, the Finance Minister and the head of the Bundesbank. This seems to be an appropriate, albeit constrained, form of critical assessment of Germany’s stance during the Crisis. On the one hand it is free of all generalisations, and predicated upon what specific individuals have said or done, but, on the other hand, it fails to investigate the undercurrents that have led these three individuals to the decisions and beliefs that they have reached. Clearly, a broader critical assessment is called for. The trick is to produce it without falling prey to the generalisations that are both politically odious and analytically misleading. Here are some principles guiding legitimate criticism of a country’s stance, with particular reference to Germany in the present juncture.

1st Principle – Analysis: Resisting the fantasy of a monolithic Germany

Consistent with my point that there is no such thing as ‘the Germans’, it is imperative that any analysis of Germany must be based on an analysis of the clash of interests within German society. One may very well argue that “Germany has benefitted from the euro” but, once stated, such a statement or claim must be immediately reconstructed along the lines of an empirical account of how, for instance, a large swathe of Germany’s working class saw their living standards fall, their working conditions deteriorate, and their democratic rights curtailed. Only then can we begin to grasp the levels of resentment within German society which, while in aggregate hugely boosted by the Eurozone’s creation, has been divided between fabulous winners, sorry losers and a middle-of-the-road band of citizens who lie in between but who never fail to fear for a future in a society so badly divided.

Additionally, unless our analysis throws light on the ‘clash of the titans’, i.e. of the tussle between Frankfurt’s financiers and the mighty German industry, we shall never manage to articulate a useful analysis of Germany’s dithering regarding closer integration, eurobonds, a unification of Europe’s banking systems, investment policies via the European Investment Bank etc. Indeed, our penchant for discovering deeper, and often unseen, conflicts within German society must be always alive and eager. Once the financial capital vs industrial capital ‘clash of the titans’ is investigated, we should swiftly move to the ‘interest gap’ between medium sized German manufacturing firms that are reliant on exports without having a foreign production base and the German conglomerates that have shifted much of their production base beyond Euroland. Unless we understand the tensions along this division too, we shall have very little insight into the undercurrents connecting the vast German medium-sized manufacturing sector with Frankfurt and Berlin.

In short, it is incumbent upon critical assessors of Germany to take into consideration, and study carefully, the unfolding drama that goes on constantly in the country as a contest of interests, faculties and functions of the different social classes, the different sectors and the different segments within these sectors of Germany’s social economy. If they do, it is utterly impossible to maintain a monolithic, stereotypical and, thus, potentially racist (and hence misleading) view on Germany.

2nd Principle – Synthesis: Assembling the ‘German Position’ on a foundation of sophisticated functionalism

The first principle was about decomposing, about an analysis of, the ‘German Position’ or ‘German Interest’ into elements that are in conflict with one another. But as always, any analytical phase must be followed by a synthetic one if a legitimate view of the ‘German Position’ is to be assembled. How can this be done sensibly and in a manner that is free of generalisation, stereotypes and sentences beginning with “The Germans…”? My answer revolves around the method which I call sophisticated functionalism.

First things first: What is functionalism? It is the tendency to explain certain entities on the basis of their function. For example, biologists explain the existence of the stomach in terms of a narrative revolving around digestion. Long before DNA was discovered, all theories about our stomachs and their functionings were based on the presumption that stomachs evolved because animals that had them digested food better and, therefore, experienced a major improvement in their ‘evolutionary fitness’. Then came DNA and our functional explanation of stomachs became sophisticated.

Now, the problem with functional explanations in social theory (but often in biology and neuroscience too) is that sloppy theorists can use it to articulate all sorts of nonsense. For example, take the absurd theory that Greece’s Eurozone membership was functional to the interests of some Masonic Lodge. Or that the creation of the EFSF was functional to Germany’s long-held plan to conquer southern Europe. Indeed, come to think of it, all idiotic and racist conspiracy theories are based on some idiotic functionalist argument (e.g. German mid-war hyperinflation was functional to the interests of Jews). While functionalism is essential to social theory (as it is to biology), it is a sophisticated form of functionalism that must underpin any critical assessment of Germany, if it is to be useful not only to the critic but also to the Germans. But what would this sophisticated functionalism look like? Here is an answer:

Sophisticated functionalism 

Functional explanations are sometimes regarded as peculiar because they appear to explain something by its beneficial effects. It is the effect of an action rather than an intention which lay behind the action which is used to explain why the action was taken. Such explanations must consist of the following five steps if they are to pass our ‘sophistication test’ and be something beyond conspiratorial:

(1) X must be shown to determine Y

(2) Y must be shown to be beneficial for some ‘agent’ or ‘agents’ Z

(3) Y must be unintended by Z

(4) We must show that the causal relation between X and Y is unrecognised by Z

(5) Our analysis must demonstrate how Y maintains X by a causal feedback loop through Z.

Example 1: Y=long giraffe neck, X=giraffe’s DNA, Z= giraffe population. Here we need not worry about (3), as no intentions are present or detectable. First, the biologist must demonstrate how the giraffe’s DNA produces the giraffe’s long neck. Then she must demonstrate how the long necks of the giraffes boost their evolutionary fitness which, in a neverending-circle, maintain the structure of the DNA that produces the long necks.

Example 2: Y=hierarchy in premodern societies, X=unequal gift exchanges, Z=rulers
We have now moved into the realm of social theory. This theory, if it is to hold water, must explain how lavish gifts by rulers to their subservient, which cannot be fully reciprocated, are not only the product of rigid hierarchies but that, in addition, help maintain these hierarchies. Note that, here, the theory becomes more interesting when the causal links are undetected by both rulers and their subservient. Each acts on the basis of their intentions (e.g. the pleasure of gift giving) but, behind their backs, social processes unfold that co-determine their intentions, beliefs and, of course, the hierarchical structure of power.

Let us now see how sophisticated functionalism can offer a foundation for a legitimate critique of the ‘German Position’. Take, for instance, my own ‘allegation’ (see It’s the German Banks Stupid!) that, to understand the toxic structure of the EFSF (the European Financial Stability Fund) one needs first to comprehend the parlous state of German banks. Can such an argument be made without generalisations and without some conspiracy theory? The answer is affirmative and comes in the form of a sophisticated functionalist theory whose elements are:

X=European leaders’ decisions, Y=EFSF’s toxic structure, Z=German bankers

To make my theory stick, I must begin by fleshing out (2) above [since (1) is self-evident], then explain the importance of (3)&(4) [namely, that the bankers do not even need to be cognisant of the manner in which the EFSF benefits them] and, finally, illustrate the feedback loop by which the EFSF’s existence helps maintain, through the actions of German bankers, European politicians’ penchant for these policies.

I know not whether my analysis of these steps is adequate or not. Indeed, my intention is to strengthen the analysis of each of these steps further. What I do know, however, is that this form of criticism is legitimate, resorts to no generalisations and, importantly, contains not an iota of a smidgeon of conspiratorialism.

3rd Principle – Contesting one’s own ‘theory’ of the ‘German Interest’: An example

Consider the critique of Germany’s mercantilism by Heiner Flassbeck (which appeared in a guest post here). I am in broad sympathy with Heiner’s thesis (which is the reason I reposted his article) and think that it maps out nicely the imbalances that were building up prior to 2008 as a result of policies employed by the German government during the 1990s and early 2000s. It is a thesis that I have often invoked during debates and presentations. Nevertheless, applying my 1st Principle above, I feel the need to re-assess these criticisms and to subject them, in turn, to critical assessment. For if criticism of Germany is not subject to self-criticism, the limits of rational and legitimate ‘reproach’ will have been breached.

Let me offer two examples of such self-criticism: The first criticism of Heiner’s critique of German neo-mercantilism (which I have subscribed to in the past) is that it focuses exclusively on Germany, presuming that the rest of the Eurozone was placid and a spectator. The second criticism is more analytical and concerns a common error that both critics and supporters of German policies commit.

Starting with the first criticism, the issue is not the so-called ‘German Interest’ but the combined interests of Europe’s business community (also known as Europe’s Capital). As my friend Joseph Halevi never ceases to remind us, Europe’s Capital is extremely keen to maintain the European Union as a ‘free hunting ground’, as a guarantor of financial rents, as the enforcer of policies that make redistribution extremely hard to effect, of wage deflation and of the shifting of competition from the market for goods and services to the market for labour (i.e. ensuring the maintenance of oligopoly power in the product market while working populations are forced to compete savagely against one another). Yet, at the same time, national bankers, rentiers and (to a lesser extent industrialists) have no interest in seeing the power of the nation-state wane. Their cosy, and highly lucrative, relationship with national politicians would wither if it did. If this is right, then the singular focus on Germany’s role is ill-judged and unfair. France’s elites were as responsible for Germany’s mercantilism as German industry, in the sense that they were happy to concede oligopoly rights to German industry (even in France) for the purpose of coming under of the umbrella of the DM (thereby restraining the French trades unions).

Turning to the second criticism, most of us take it for granted that Germany’s successful squeezing of labour unit costs prior to the Crisis boosted its competitiveness in relation to the rest of the Eurozone (with detrimental effects on the balance of payments of the Periphery). Interestingly, this thesis is propagated both by mainstream German economists and politicians and by critics of Germany’s mercantilism. But, is this thesis correct? Or, to be more precise, is it as straightforward as it sounds?

The first thing to recall is that the Periphery always maintained a trade deficit with Germany. Always! How was this sustainable? Via continual devaluation of the lira, the peseta, the drachma, is the conventional answer. Nevertheless, we must also note that, with the exception of northern Italy, the rest of the Periphery’s competitiveness was never really helped by those devaluations. Greece, for instance, never produced any cars and, thus, the devaluation of the drachma only slowed down the rate at which Volkswagens were being imported; what it never achieved, by definition, was an increase in Greek car exports to Germany. What of other products, like oranges and olive oil? The demand for those was more or less inelastic in Germany and, thus, all that happened really was that the devaluation of the drachma enhanced Greek farmers’ profit margins (especially when the devaluations caused hyper-inflation at home). The same applies to the euro era, when Germany succeeded in squeezing unit labour cost growth (below that of the Periphery plus France) and to maintain an inflation rate well below the Eurozone average: Prices of German industrial goods in the rest of the Eurozone did not fall in Greece, in Italy, in France. All that happened was that German oligopoly profits increased while Greece, Spanish, Italian and Portuguese profitability collapsed (especially after the tide of German finance capital to the Periphery receded in a hurry).

In summary, a nuanced critique of Germany’s role in the Euro Crisis requires not only proper ‘analysis’ (see 1st Principle), sophisticated functionalist synthesis (see 2nd Principle) but, in addition, critical assessment of the critical theories themselves.

Summary and conclusion

I began this piece by claiming that generalisations are the first step on the road to fully-fledged racism and, to boot, to highly misleading economic analysis. Germany has been, for a while now, in the firing line from various quarters (including myself) regarding its handling of the Euro Crisis. Can the ‘German Position’ be subjected to rational assessment and criticism without generalisations? I think so, even if – admittedly – it requires considerable skill to stay on a ‘fine line’. In the preceding paragraphs I tried to outline that ‘fine line’ in the context of three principles which we ought to respect when putting together a critique of Germany but, also, of other national governmental stands.

The 1st Principle focused on the need to avoid treating Germany as a monolith with consistent preferences, interests and beliefs. In a recent post, addressed to me, Kantoos Economics takes me to task for stating that Germany benefited significantly from the euro. Does this statement violate the 1st Principle? Yes and no. In one sense, there is no doubt that Germany’s trade balance did benefit. However, it is important to note that this does not mean that the benefits of burgeoning net exports were distributed to all segments of German society. Indeed, there is plenty of evidence suggesting that large parts of the German working class saw their living standards drop substantially. In brief, while it is possible to point to aggregate measures (such as the nation’s trade balance or GDP), it is essential that distributional issues, as well as issues related to the relative bargaining power of various strata or classes, are taken into account in a manner that breaks down any monolithic view.

The 2nd Principle concerns the proper, or legitimate, method for approaching the unconscious, and unintended, feedback effects between different German economic interests, German policy makers’ decisions, and the Eurozone’s fortunes. Crucial to this method is the recognition that many of the outcomes are unintended and that the causal relations (including the feedback effect), which do most of the work of fashioning outcomes escape the mindset of the actors whose choices drive history. In short, there is no conspiracy behind actions which look as if driven by certain interests and beliefs. I gave one example of how such an explanation can work in the context of the EFSF and Germany’s private sector banks. Another example comes from a piece I wrote two years ago (entitled A New Versailles hunts Europe – in which I characterised the bailout terms imposed upon Greece as a New Versailles Treaty). In that article I had written the following lines:

“Retribution was the order of the day, especially in the mindset of a nation [N.B. Germany] that, over the past century, has accepted its collective punishment gracefully and managed to rise out of the mire through sheer hard work and extensive reform. Greece should pay for its sins too. For Germans, the cost of saving the Greek state from the clutches of the money markets was not the issue. The issue was that Greece should suffer a deserved punishment for putting at risk a club which gallantly bent the rules to have it admitted as its member. And when the said club is the one issuing the currency in which the German people trade, save and take collective pride, that punishment took on the significance of a crucial bonding ritual.”

Kantoos Economics, again, took me to task for these lines: “This is just flat-out wrong,” he said, adding: “And offensive. Germany’s motivation was never retribution. Many German policy makers simply misdiagnosed the crisis as one of public debt alone and argued, correctly according to their diagnosis, that Greece should simply spend less and tax more to get out of it.” I beg to differ. While my 1st Principle bans me from generalisation, this ban cuts both ways: if Germany’s view is not monolithic it can neither be said to seek retribution (against Greece) nor to not seek it! Nonetheless, it is perfectly legitimate to perform the following mental experiment: Suppose that there were a button that the German Chancellor could press to make the Greek debt and the Greek current account deficit go away without any pain for the Greek people. Would a majority of German voters want Mrs Merkel to press it? Or would they prefer a significantly less efficient outcome (in terms of combating the Greek crisis), which is accompanied by significant hardship for the Greeks?

I have no doubt that both the German public and a large majority of German policy makers would opt for the latter, motivated by a mixture of (a) an urge to see that the Greeks are ‘taught’ a lesson (retribution) and (b) a view that such pain is important to deter the spendthrift Greeks (and assorted Peripherals) from repeating their ‘sins’ in the future. In this sense, my statement that Germany seeking ‘retribution’ was a prime mover behind the Greek bailout package is utterly legitimate. Having said that, in order to prevent feeding others’ penchant for racist anti-German views, if I were to edit that quotation, I would have replaced “Germans” with “mainstream conventional views in Germany”.

Finally, the 3rd Principle calls for a constant drive to criticise our own criticisms of Germany; to keep on our toes about the possibility that our critical assessment of the Eurozone’s most significant member-state is flawed. Without such self-critical posture, our criticism is bound to verge into the realm of both moralising nonsense and analytical paucity.

Lastly, turning one last time to my two year old (plus) piece on Germany’s mindset when the bailout conditions were imposed on Greece back in May 2010, and reading it again in the context of the three principles in this article, I am pleased that it seems to pass this new test. Here is how it concludes:

“In this context, turning countries like Greece into sundrenched wastelands, and forcing the rest of the Eurozone into an even faster debt-deflationary downward spiral, is a most efficient way of undermining Germany’s own economy. Assuming, for argument’s sake, that Greece is getting its just deserts, do the hard working Germans deserve a political elite that quick-marches them straight into economic catastrophe? I do not believe they do. But it has happened before and it may happen again. To quote Keynes’s 1920 book on the Versailles Treaty one last time: ‘Perhaps it is historically true that no order of society ever perishes save by its own hand.’”

Two years on, Greece has been turned into a sundrenched wasteland. And the rest of the Eurozone has been (and is being) pushed into a debt-deflationary downward spiral. Moreover, these developments are now undermining Germany’s own economy, plunging German workers into an economic catastrophe that they do not deserve. Such criticism of Germany, free of generalisations, predictively accurate, and displaying equal concern for German workers and the pains of the Periphery, is analytically useful because it is ethically and politically legitimate. I stand convinced that the three principles outlined here help us achieve this benign balance when subjecting proud nations to critical scrutiny. {jathumbnailoff}

Image top: slowafternoon.