Powerful rules governing the euro: the perverse logic of German ideas

Abstract

Ideas are at their most powerful as an explanatory variable when they lead agents to go against any broadly reasonable interpretation of their material self-interests. They become even more intriguing when they are instrumental in actually causing a crisis, in which actors undercut their own stated goals and then continue to make matters worse by sticking to those same ideas, even in the light of clear evidence that the policies they inspire are not working. This contribution shows two dynamics between power and ideas to explain Germany's behavior during the euro crisis. The first dynamic examines the changing macroeconomic consensus on how to conduct monetary and fiscal policy that governed the euro from 1999 to 2012. The second dynamic shows how a strict adherence to Germany's ordoliberal ideas of budgetary rules and structural reform turned a containable Greek fiscal problem into a full-blown systemic sovereign debt crisis.