Hawks to doves? Germany's new generation of economists

Then German finance minister Olaf Scholz declared he was willing to negotiate a European deposit guarantee and a eurozone budget.

Isabel Schnabel, a monetary dove, became the new German board member at the European Central Bank. She called it "dangerous" that "German politicians, media and bankers reinforce the image that the ECB is stealing German savings".

Finally, Jakob von Weizsäcker was appointed chief economist at the German ministry of finance. Ten years earlier, together with a French colleague, he wrote a proposal for 'blue' eurobonds.

So in 2019, slowly but perceptively, new sounds could be heard in Germany on the European economy and the euro. Everyone understood this would not change German ordo-liberal positions overnight. But no one ruled it out in the longer term.

They were right.

The Merkel-Macron corona recovery plan, announced last week, is not a German corona 'whim' but rather the fruit of a long, steady development in Germany, one of which is a change of the economic guard.

Hawks vs Doves

For years, hawks dominated German economic thinking about Europe.

During the eurocrisis Wolfgang Schäuble was minister of finance. Schäuble once had almost revolutionary ideas about Europe – his 1994 plan with fellow Christian Democrat Karl Lamers called for a multi-speed Europe with deep integration in a smallish eurozone nucleus.

But France rejected the plan.

Afterwards Schäuble became a cautious man. With him at the helm of the ministry a eurozone budget or eurobonds became almost unmentionable.

He warned against moral hazard, and argued that 'program countries' like Greece or Portugal had to suffer austerity just like eastern Germany or the Baltics had after the 'Wende' in 1989.

Schäuble was said to be in favour of Greece leaving the eurozone in 2015.

Olaf Scholz, a Social Democrat, succeeded him in March 2018. He brought several younger economists into the ministry.

Most are in their forties or early fifties, and have been trained on American-styled PHD programmes, with Anglo-Saxon textbooks, at the university of Bonn or abroad.

The director of the Brussels thinktank Bruegel, Guntram Wolff, who is part of that generation, recently called this "an intellectual shift" compared to the previous generation of 60-plus economists, mostly trained in the German conservative tradition.

Like Schnabel, Von Weizsäcker and others who are now reaching influential positions, Wolff studied in Bonn.

This new generation – including Henrik Enderlein, Marcel Fratzscher and others - is more open and uninhibited towards other Europeans.

In early May, some of them sharply criticised the German Constitutional Court in Karlsruhe when it ruled that the ECB overstepped its mandate.

During his first two years in office Scholz did not initiate real material changes.

Schäuble often refused to discuss matters in Brussels and then made small concessions later on. Scholz did the opposite: he was willing to talk about more Europe, but then set so many conditions that nobody could do much with it.

When he took office, Scholz said: "A German minister of finance is a German minister of finance". In other words: he would not do things differently than his predecessor. This was meant to reassure German citizens who had feared for their savings during the euro crisis.

For two years Scholz and his 'new generation' did not get very far with the CDU either. Chancellor Angela Merkel is more centrist than the average CDU voter.

Scholz could talk about eurobonds and European deposit guarantees whenever he liked - the CDU didn't give a inch.

Then the Greens became the second-largest party in Germany. Some observed that they could become instrumental in breaking the deadlock. The Greens don't share the obsession with the 'Schwarze Null' [Black Zero], nor are they traumatised by eurobonds. Their Europe program mentions 'solidarity'. They support European unemployment benefits, a European minimum wage and fiscal federalism as proposed by France.

Merkel's change of mind

Merkel changed her mind about European solidarity because of Covid-19. This was the trigger.

Italy's debt would skyrocket, but this time the government in Rome bore no blame.

Moreover, Germany subsidises its companies much more generously than Spain, giving these companies unfair advantages on the internal market. Balancing this out, Merkel realised, was urgent and required unorthodox measures.

The functioning of the market was at stake. Germany had to take its responsibility.

This is why Merkel favours grants to corona-stricken countries, not loans. This is why she suddenly wants to do this through the EU budget – a common bond. Merkel said: "In times of crisis you need to come up with clear ideas. And fight for them."

Scholz' new men in the finance ministry, who put together a national €500bn "corona bazooka" in March, started to negotiate with French colleagues straight away. They accelerated and delivered – this was the chance they had been waiting for.

Much of the talk about the "Hamilton moment" - the American finance minister using the bankruptcy of the south in 1790 to federalise fiscal policy – came straight from Scholz's ministry.

For many Europeans Merkel's change looked sudden. But the groundwork started two years ago. Germany slowly ripened for the Merkel-Macron plan.

This explains why it didn't meet massive public resistance in Germany. The Greens and the SPD support the plan.

Economists commenting on it in the media had balanced views. Even some liberals were cautiously positive.

The CDU rolled out prominent members in Merkel's defence. One of them: Schäuble. He backed her decision to distribute mostly grants, not loans. "Loans would have been stones, instead of bread" to debt-stricken countries, he said.

It wasn't the chancellor who shifted, Germany did. When this happens, Europe usually shifts, too.