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Transcript of Changing the Debate on Europe
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Lord Ralf Dahrendorf (19292009)
1958 to 1969 Professor of Sociology at the Universities of Hamburg, Tbingen and Konstanz1967 to 1970 Chairman of the Deutsche Gesellschaft fr Soziologie
1968 to 1969 Member of the Parliament of Baden-Wrttemberg
1969 to 1970 Member of the German parliament for the Freie Demokratische Partei (FDP) and Parliamentary
Secretary of State in the Ministry of Foreign Affairs, Berlin
1970 to 1974 Commissioner for External Trade (European Commission under President Franco Maria Malfatti)
and Commissioner for Science (President Francois-Xavier Ortoli)
1974 to 1984 Director of the London School of Economics and Political Science (LSE), London
1976 to 1979 Commissioner of the Royal Commission on Legal Services (Benson Commission)
1984 to 1986 Professor of Social Science, Konstanz University
1987 to 1997 Warden of St Antonys College at the University of Oxford and later Pro-Rector
1993 Appointment as life peer named Baron Dahrendorf of Clare Market of the City of Westminster
2005 to 2009 Research Professor at the Social Science Research Center in Berlin (WZB)
Global Policy Volume 3 . Issue Supplement 1 . December 2012
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Introduction: A Moment forEuropean Sturm und Drang?
Damian ChalmersLondon School of Economics and Political Science
In a 2003 article Lord Dahrendorf made three striking
observations about democracy in Europe (Dahrendorf,
2003, p. 101). The first was that the European Union was
increasingly occupying the space of technical coopera-
tion while national democracies were reinforcing their
hegemony over issues of emotion and affect. The
boundary between the technical and the emotional
might move significantly over time so that money might
become a matter for international technical cooperation
and cease to be a strong national symbol. Dahrendorf
lamented this dichotomy. He noted that it was associ-
ated with a world in which the technisation of important
issues made them less susceptible to common sense
and less comprehensible to ordinary people.
Secondly, independently of this, Europe had generated
a peculiar cleavage. It had become associated with a
utopia for the centre left. The centre right was increas-
ingly identified with scepticism towards the European
Union and in some cases it replaced the Soviet Union, as
the political enemy around which the Centre Right or-
ganised itself. Thirdly, Dahrendorf was concerned about
the quality of democracy in the European Union. Forhim, democracy was a political process that placed
checks and balances on political power, allowed all citi-
zens voice and brought about significant nonviolent
change in our societies. He saw the European Union as
an organisation in which administrative power was insuf-
ficiently checked and in which it was difficult to conceive
of popular voice at a supranational level except through
street demonstrations or the media (Dahrendorf, 2003,
p. 107).
Since 2009 this has, of course, ceased to be character-
istic of the Union. Conflict and instability within political
institutions and popular protest on the streets havebecome leitmotivs of the European Union. Alongside
this, the demarcation between the technical and emo-
tional, unstable at the best of times, has broken down.
The arcane language of inter-bank lending rates, mutual-
isation of risk, annual structural balances, troika meetings
and European stability mechanism processes has
become not merely the object of protest and anger but
the obsession of blogs and newspaper front pages
across the Union.
It is to be wondered what Dahrendorf would make of
this. He saw popular protest as desirable and necessary;
a sign that people realised something was wrong and
were sufficiently engaged to exercise voice about it,
often at some risk. However, the direction of all this pro-
test is very unclear. The turmoil may, indeed, lead to the
political creativity, vibrant debate, curbs on power and
mutual engagement that Dahrendorf and others saw as
productive consequences of conflict. They saw this, how-ever, as a consequence of bounded processes in which
the terms of engagement prevented its abuse and in
which there was a certain level of clarity about what lay
at the heart of the conflict. The meaning of these fea-
tures in the current crisis is unclear. Conflicts have fluidly
spilled from one arena to the other and the central
refrain has been anger and protest rather than clear
political agendas. If one concern is that this might lead
to extremism or authoritarianism, another is that nothing
will be left unchanged. There might be disruption and
political change but the central dynamos leading to the
current predicament remain fundamentally untouched.
This issue looks at three of these: the processes thathave led to the Union being a space for technical coop-
eration rather than vigorous political contestation, the
resilience of the characterisation of Europe as a utopia
and finally, Europes need to build a common and demo-
cratic social space.
Three elements are identified as contributing to the
first of these. The first is the presence of a politically
attractive consensus, noted in Schelkle and Hassels arti-
cle about economic policy-making, which emphasises the
pre-eminence of monetary policy, in particular the setting
of short-term interest rates by independent central banks,
to anticipate and correct shocks in the economic cycle.The authors ask why this model has remained so popular
notwithstanding its treatment of the foundations of
microeconomics as an empty space and its tendency to
neglect asset or debt bubbles. Their conclusion is that by
pressurising policymakers to make labour market reforms
to respond to the pressure from interest rate policy, it
leads to a preference for cheap labour over higher unem-
ployment: an electorally attractive idea for both centre
left and centre right political parties.
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However, it might be observed that pan-Union politi-
cal parties do not exist and the levels of political
contestation in Union institutions are limited. How did
this consensus, therefore, enter the Unions policy
space? The second feature of the Union institution set-
tlement accounts for this policy diffusion. Schwarzers
article points out how, even during the period of
intense legislative activity and political engagement dur-ing the crisis, the Union institutional settlement has
been marked by incrementalism. This incrementalism is
present in the policies put forward: be it the increased
commitment to the principles of the excessive deficit
procedure or the commitment to labour market reform,
first present in the EU programme on flexicurity and
now in the Euro-Plus Pact. In all cases there is a sense
of permeation rather than the debate of ideas. This is
also present with institutional reform. Schwarzer claims
there has been a move towards greater intergovern-
mentalism as a result of the crisis. Yet, in all cases, it
has developed around and latched itself onto pre-exist-
ing structures. She concludes that this incrementalism is
insufficient to generate the reforms necessary for the
current challenges.
This brings us on to the third characteristic of Union
policy-making, leadership. Strong leadership could, after
all, break this mould. In their study of the backgrounds
of prime ministers, economic ministers and central bank-
ers since 1973, Hallerberg and Wehner discover that
these are significantly more likely to have a legal back-
ground in EU states than in other OECD states. There is
only a strong shift to leaders with an economic back-
ground at moments of economic crisis. They do not
speculate about the implications of this. However, if thequalities associated with lawyers include training in
adversarial argument, mastering briefs and public com-
munication, they also include an interest in rules. And
the conduct of economic policy through the develop-
ment and application of rules is very much what the
Union is about! Furthermore, there is little evidence that
the shift to economists during moments of crisis is borne
of a desire to generate a paradigm shift in economic
policy-making: rather, it is associated with the careful
deployment of existing economic models undeflected by
political opposition.
There is a good chance that Dahrendorf would havebeen critical of all three of these dynamics. Troublingly,
the first two, at least, have been reinforced by the crisis.
The European Union still retains the power, however, to
be the receptacle for normative re-imagination. In her
contribution, Kaldor argues that many of the concerns
about loss of sovereignty or centralisation of administra-
tive power are misplaced. The Union, for her, is a new
form of political authority different from that of the
nation-state that could be a model for global gover-
nance more generally. To make this point, she analyses
the Common Security and Defence Policy through the
prism of the human security template, and argues that
this led the European intervention in Libya to be differ-
ent in quality from that if NATO had taken the lead.
Risses piece considers the extent of the hold of
this vision on policymakers. He notes that foreign pol-
icy is much more Europeanised than many realise and
that this Europeanisation rests strongly on the lan-guage of human rights and democracy. However,
below the surface, he notes deep challenges, and it is
unclear how strongly this language informs policy-
making. Risse notes that, on the one hand, it is used
in areas such as defence at the levels of the Europe-
anisation of elites. He also notes, in his study of atti-
tudes to Turkish membership of the Union, that there
are deep disagreements about how widely it is to be
deployed. This is taken further in the two pieces by
Arne Westad and Michael Cox, respectively, on this
issue, which look at the two central partners, the USA
and the Union, and the two central competitors in
foreign policy, the USA and China. Cox notes that if
resort to the language of common values and ideas
of the West may have allowed European states to be
some of the more reliable allies of the USA, it has
insufficient hold alone to deal with a relationship
which is fast changing simply by dint of Europe mov-
ing from being a predominant partner in US foreign
policy to its becoming an important part of a wider
jigsaw. By contrast, Westad observes that there is a
sense of the growing importance of Sino-European
relations in both Europe and China. If, in China, this
is marked in part by the Union being seen as a coun-
terweight to the USA, Westad observes a deep failureon the Union to develop or communicate a clear pol-
icy on China. He observes that, paradoxically, the cen-
tral determinant for relations between the European
Union and China likely to be how United States for-
eign policy develops.
Beyond policy-making within the European Union and
the Union as a global actor, a third dimension attracted
Dahrendorfs attention: the complex relation between
Europe and its citizens. In their piece, Anheier and Fal-
kenhain observe that a number of mechanisms (both
bottom-up and top-down) has been developed to make
people cross borders and identify as Europeans. Theyfind, however, that most of these mechanisms have a
social bias and neglect large parts of the population,
most notably the new precariat and less educated
people.
This issue suggests that, both within its own territory
and more broadly in the world, if the Union retains its
ability to be associated with a sense of vision, it has a
limited capacity, for all that, to think the unthinkable, as
Dahrendorf would have urged, and revisit received
wisdom. It is both ironic and a tragedy that it is the
Damian Chalmers4
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machinations and failures of global finance that have
led the Union to a position at the December European
Council, where it will have to make hard choices about
what sort of Europe it wants for its citizens and to be
projected more widely. Dahrendorf would have urged
ambitious, fractious and creative debate where nothing
is treated as untouchable and where a premium is
placed on popular engagement. We shall wait and seeif that happens.
Reference
Dahrendorf, R. (2003) Making Sense of the EU: The Challenge for
Democracy, Journal of Democracy, 14 (4), pp. 101114.
Author Information
R. Damian Chalmers is Professor of European Union Law of the
London School of Economics and Political Science, London, UK.
European Sturm und Drang5
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Setting the Stage: Lord RalfDahrendorf and the EuropeanProject
Helmut K. Anheier
Dean and Professor, Hertie School of Governance
Gesa-Stefanie Brincker
Project Manager, Hertie School of Governance
Lord Ralf Dahrendorf was convinced of the fundamental
responsibility of intellectuals to doubt all received wis-
dom, to wonder at that is taken for granted, to question
all authority, and to pose all those questions that other-
wise no-one else dares to ask (Dahrendorf, 1963). With the
Dahrendorf Symposium series we want to honor his leg-
acy the legacy of a political intellectual who was an intel-
lectual politician at the same time. He never took Europe
and the European Union (EU) for granted. Over the course
of nearly five decades he repeatedly and publicly raised
often uncomfortable questions about Europe; its achieve-
ments, potential and weaknesses; but especially, he
fought for Europe as a democratic project, as a project of
citizens continuously seeking a better Europe.
The 1970s: We need a second Europe!
After a brief period in the German Parliament, serving as
State Secretary in the Foreign Office, Dahrendorf became
Commissioner for External Relations and Trade in the
European Commission in 1970. In 1971 he published two
articles in Die Zeit under the nom de plume WielandEuropa. In these two articles he blamed the first Europe,
that is, the achievements of the European Community
(EC), for being a project concerned with butter, sugar,
fish and meat. Dahrendorf criticized an unsupportable
discrepancy between rhetoric and reality (Dahrendorf,1996) and blamed the institutions for their lack of
accountability. He called for a second and more political
Europe to overcome the problems created by the first.
He suggested the regular consultations of foreign minis-
ters and habit-forming co-operation in as many areas
of policy-making as appropriate (Dahrendorf, 1990,
p. 127). Dahrendorf also advocated differentiated integra-
tion: Some of this might well be la carte, so that mem-
bers of the Community can pick and choose whether
they want to participate (Dahrendorf, 1990, p. 127). The
two articles provoked controversy; Dahrendorfs pseudo-
nym did not remain secret for long. His harsh judgment
(he later called it realism) almost caused his dismissal by
a motion of censure in the European Parliament. Two
years later, in 1973, in his book Pldoyer fr die Euro-pische Union he proposed, among other recommenda-tions, making the European Commission an institution
answerable directly to an elected European Parliament.
The 1980s: Quelques lueurs despoir dans unciel sombre
In the early 1980s, as director of the London School of Eco-
nomics (19741984), against the background of the Winter
of Discontent and Thatcherism, Dahrendorf drew a verycritical picture of the development of the EC, depicting it
as a grouping of partly unwilling members, without objec-
tive, working in an intransparent chaos of institutions, in
which an elected Parliament acted without functions and
competencies (Dahrendorf, 1983, p. 190). He raised the
fundamental question why visions are included in official
documents although we know that these remain visions
because nobody knows how we can get rid of the para-
lyzed Europe of today? (Dahrendorf, 1983, p. 190). At the
same time he presented the common market as a success
story. According to Dahrendorf, the European Economic
Community (EEC) had the potential to become an eco-nomic engine for developments in the world, or at least for
OECD countries. The collapse of the economic world order
in the 1970s called on the EEC to respond to global chal-
lenges. He pointed to the European monetary system as an
arduous substitute in need of institutional strengthening
in a post-Bretton Woods world order. Dahrendorf, how-
ever, also raised the question whether Europes momen-
tum of the 1950s and 1960s had exhausted itself: LEurope
reste-t-elle jamais un subjonctif, dans le meilleur des cas
un optatif? (Dahrendorf, 1982, p. 348).
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The early 1990s: The European Revolution of1989
As Warden of St Anthonys College in Oxford (1987
1997), Dahrendorf celebrated his 60th birthday in May
1989 when the Iron Curtain started to fall. In his book
Reflections on the Revolution in Europe he rejected thedominant reading that the countries of Central and East-
ern Europe had chosen capitalism over communism;
instead, he claimed they aspired to return to Europe
and to build an open society in which there are 100 dif-
ferent ways forward to freedom and a handful on offer
at any one time (Dahrendorf, 1990, p. 109).
Dahrendorf was convinced that the EC and its mem-
bers had a central responsibility for the future develop-
ment of Central and Eastern Europe. The exceptional
events of 1989 delighted him and encouraged him to
formulate his vision. On the one hand, he saw Europe as
a village built around a solid house called the EC
(Dahrendorf, 1990, p. 136), a house that is not exclusion-
ary or one bloc divided from others, but a project thatunites citizens. On the other hand, his vision of Europe
went far beyond the continents borders: [My vision of
Europe] will forever be the Kantian project of a world
civil society with truly international institutions to guide
and to sustain it (Dahrendorf, 1990, p. 129). The demo-
cratic Europe of citizen democracies was his model.
The late 1990s: European reform is imperativeif the EU is to survive
In 1993 Dahrendorf was appointed life peer, Baron
Dahrendorf of Clare Market in the City of Westminster a prominent location on the LSE site. With his earlier cri-
tiques still valid, he concentrated on concrete reform
steps that would make the EU more relevant for its citi-
zens and the world. He recommended including an
updated European Convention on Human Rights in EU
treaties as a way to increase citizens identification with
Europe, to strengthen the democratic accountability of
the European Commission and to make social cohesion
among citizens a crucial objective for the future. Finally,
he called on the EU to include the new democracies of
Central and Eastern Europe. Enlargement to the east is a
vital responsibility of a democratic EU, he noted(Dahrendorf, 1996, p. 1). If this endeavor were to fail, the
EU would lose its appeal to attract non-members.
The 2000s: How is democracy in Europepossible?
In January 2005 Dahrendorf was appointed a Research
Professor at the Social Science Research Center in Berlin.
Over the next few years his critique of the EUs demo-
cratic weakness became more severe, culminating in his
charge that the EU betrayed its very own democratic
principles. The EU itself would fail any application for
membership if it wished to join the Union. The EU
lacked both the demos and a political class bridging
Brussels and member states. How is democracy in Europe
possible? he was asked. Considering the European institu-
tions that negotiate behind closed doors as an insult for
democracy (Dahrendorf, 2002, p. 35) he stated that insti-tutional reform preserving the status quo would not solve
the systemic problem of the EU; neither would any consti-
tutional treaty not based on popular demand. He called
on the EU to focus on liberal, not statist principles when
building a European demos. In 2009, shortly before he
died, Dahrendorf assessed the economic and financial
crisis as the result of debt-leveraged capitalism (Pumpkapi-talismus). He argued that the crisis could also give rise to achange in Europes economic-political culture. Concretely,
he called for a responsible capitalism (Dahrendorf, 2009,
p. 9) marked by medium-term and long-term thinking on
the part of its leaders.
Challenges and tensions
Looking back and looking forth, it is remarkable how valid
Lord Dahrendorfs criticism, and how relevant his sugges-
tions for Europes future remain. His reflections about the
EU capture some of the fundamental challenges concern-
ing its architecture, performance and communication.
Dahrendorf repeatedly rejected the argument that Europe
would develop automatically and inevitably by some
functional logic towards a political Union. History does
not work that way (Dahrendorf, 1989, p. 8), he stated.
Instead he argued that concrete, pragmatic and politicalsteps are needed to move the EU forward albeit demo-
cratically legitimated steps. He rejected the idea of Eur-
opes finalit but rather saw it as an ongoing politicalbattle between federalists and confederalists (Dahrendorf,
1973). As any vision of Europe from generations past may
ring hollow to those that follow he was convinced that
every generation has to reinvent Europe.
Concerns about the Europe of citizens were centre-
stage in Dahrendorfs reflections. Dahrendorf asked him-
self how to reconcile citizenship and the EU, how to
make democracy and freedom in a post-national context
work (Garton Ash, 2009). He argued that in absence ofdirect democracy, forms of deliberative democracy, as
part of an emerging European civil society, are a second
best option. Europe is part of the West, as a normative
concept that stands for human rights, the rule of law
and checks and balances (Winkler, 2010). The EU should
play an appropriate role in the world, if possible, in con-
junction with the USA. In the absence of global rules
and agreements, the European Project serves an impor-
tant model for others. These challenges involve tensions,
some of which become even more blatant in the current
Setting the Stage7
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financial and Euro crisis: The desire to construct a stable
EU that serves as a model for post-national cooperation
seems, for instance, hardly compatible with the need for a
continuous reinvention of Europe from the inside. More-
over, an emerging European civil society actively engaged
in shaping the European project is not backed by broader
societal support. By contrast, the majority of citizens are
indifferent to the EU and how it operates. Finally, there isa discrepancy between the principle of democracy and
the reality that EU institutions remain too remote from the
citizens. Dahrendorfs legacy and challenge to us is to
come to terms with these tensions in the changed context
of the crisis-prone early 21st century.
The 2011 Dahrendorf Symposium
Following these thoughts, the inaugural Dahrendorf
Symposium focused on the ambiguity of positive and
negative meta-narratives for debating the future of the
European integration project. The Symposium and itscore themes engaged with central issues of the Euro-
pean debate in the field of politics, economics and soci-
ology as well as with ideological and global questions.
The Hertie School of Governance, the London School of
Economics and Political Science and Stiftung Mercator
jointly organized the Dahrendorf Symposium 2011 at the
Berlin-Brandenburg Academy of Sciences and Humanities
on 910 November 2011. They brought together leading
academics, policymakers and the media from across Eur-
ope and beyond. The inaugural symposium took as its
theme Changing the Debate on Europe: Moving Beyond
Conventional Wisdoms. Five international research
groups, lead by faculty members based at either the Her-tie School or the London School of Economics, involved
academics from other European institutions. In this con-
text renowned members of this newly established
research network developed several working papers, a
number of which are included in this special issue.
All articles, contributions and speeches included
in this issue were developed for the 2011 Dahren-
dorf Symposium, a joint initiative of the Hertie
School of Governance, London School of Econom-
ics and Political Science and Stiftung Mercator.
References
Garton Ash, T. (2009) On Liberty. The Dahrendorf Questions. Oxford:Medical Informatics Unit, NDCLS, University of Oxford.
Dahrendorf, R. (1963) Der Intellektuelle und die Gesellschaft, DieZeit, 29 March.
Dahrendorf, R. (1973) Pldoyer fr die Europische Union. Munichand Zurich: Piper.
Dahrendorf, R. (1982) Quelques Lueurs Despoir dans un Ciel Som-bre, in A. Miguel de and Dahrendorf, R (eds) La crise en Europe.Paris: Fayard.
Dahrendorf, R. (1983) Die Chancen der Krise: ber die Zukunft desLiberalismus. Stuttgart: Deutsche Verlagsanstalt.
Dahrendorf, R. (1989) The Future of Europe, in Dahrendorf, R., Hos-
kyns, J., Curzon Price, V., Roberts, B., Wood, G.E., Davis, E. and
Sealy, L.S., (eds) Whose Europe? Competing Visions for 1992.London: Institute of Economic Affairs.
Dahrendorf, R. (1990) Reflections on the Revolution in Europe: In aLetter Intended to Have Been Sent to a Gentleman in Warsaw.London: Chatto & Windus.
Dahrendorf, R. (1996) Why Europe Matters: A Personal View, Report,20 September 1996. London: Centre for European Reform.
Dahrendorf, R. (2002) Die Krisen der Demokratie. Ein Gesprch mitAntonio Polito. Munich: Beck.
Dahrendorf, R. (2009) Nach der Krise: Zurck zur protestantischen
Ethik?, Merkur, 720 (May).Winkler, Heinrich (2010) Greatness and Limits of the West: Reflec-
tions on an Uncompleted Project, Lecture on 7 October 2010,London School of Economics and Political Science.
Author Information
Helmut Anheier is Dean and Professor, Hertie School of Govern-
ance. He also holds a chair of Sociology at Heidelberg University
and is Academic Director of the Center for Social Investment.
Gesa-Stefanie Brincker, Dahrendorf Manager, Hertie School of
Governance, is a manager for the research project Changing the
European debate at the Hertie School of Governance and seminar
coach for the Schwarzkopf Stiftung Young Europeans.
Helmut K. Anheier and Gesa-Stefanie Brincker8
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The Educational Competence ofEconomic Policymakers in the EU
Mark HallerbergHertie School of Governance
Joachim Wehner
London School of Economics and Political Science
AbstractThis article compares the competence of the principal economic policymakers in 27 European Union (EU) memberstates with those in other advanced economies. Following earlier work on specialists in government, we considerwhether prime ministers, finance ministers and central bank governors have an education in economics or a relatedfield like business. We find that EU prime and finance ministers are more likely to have legal than economics training,
which distinguishes them from their OECD peers. Among the most recent accession countries, economic policymakerswere better trained prior to accession than after it. Eurozone economic policymakers have essentially the same overalllevel of education as their EU peers outside the eurozone, but eurozone prime ministers, in particular, are much lesslikely to have advanced economics training. Among the exceptions are countries experiencing a high frequency offinancial crises. In these cases the level of economics training is comparatively high. We speculate that these countrieshave little choice but to appoint policymakers who, at least in terms of background, appear to be competent.
Policy Implications Educational backgrounds of Europes economic policymakers vary considerably. These differences may translate into policy differences.
While there are countless volumes of biographies of
individuals, there has been little systematic study of
the personal characteristics of economic leaders. One
exception is the work by Blondel (1985), who presents
a systematic global survey of government ministers
from 1945 to 1980, including their occupational back-
ground. He discusses differences between amateurs
and specialists, with specialization indicated by minis-
terial appointments to posts that correspond with their
prior training. Others have considered the backgrounds
of political leaders (Besley and Reynal-Querol, 2011;
Dreher et al., 2009; Goemans et al., 2009) and of cen-
tral bankers (for example, Ghlmann and Vaubel, 2007).
There is also a body of literature on the traits of top
managers in the private sector (for example, Kaplan
et al., 2008). The only work we know of to date that
focuses specifically on finance ministers is that of Blon-
del (1991), although Chwieroth (2007; see also 2010)
does consider whether central bankers and finance
ministers in developing countries have neoliberal edu-
cational backgrounds. Even then, little attention has
been paid to variations in the level of educational
attainment and differences in specialization of eco-
nomic leaders.
In this article we review certain personal characteris-
tics of the principal economic policymakers in European
Union (EU) member states, focusing on their educa-
tional background. Our sample includes the 27 coun-
tries when they were democracies since 1973. To study
whether the patterns are EU-specific or found more gen-
erally in the advanced market democracies, we also
include comparative data from most OECD countries that
are not members of the EU. The main goal of the article is
descriptive to map out patterns in education. We also
make no claims that certain types of policymaker neces-
sarily lead to better economic policies more generally
(for example, Besley et al., 2011; Rogoff, 1985). At the
same time, there are patterns that suggest possible cau-
sal relationships, which we intend to explore in follow-
up research. However, before one can more fully
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examine causal mechanisms relating to policy, one must
first understand why certain types of people and not
others are appointed. We would also prefer to map out
our data on a case-by-case basis to examine causality
more directly. This article must be more humble and
focused on description.
To preview, we find that EU finance ministers are less
likely to have training in economics or business thantheir peers in OECD countries. We also find, however,
that competence, as assessed by training, is higher
among economic policymakers in some eurozone coun-
tries like Greece and Portugal that have had financial
difficulties (Reinhart and Rogoff, 2009). Our assumption
is that countries that face severe economic problems
have little choice but to appoint policymakers that, at
least in terms of their background, appear to be
competent.
1. European Integration and Economic
CompetenceThere are good reasons to concentrate on the back-
grounds of European economic policymakers in particu-
lar. First, the responsibilities of the EU more generally
are strongly weighted towards economic policy. The EU
is especially active in regulation (for example, Majone,
1996) but it is responsible for additional economic poli-
cies as well. It negotiates exclusively trade treaties. Inter-
nally, capital, labor, services and goods can mostly
circulate freely because of EU statutes and their enforce-
ment through the European Commission and rulings
from the European Court of Justice. Member states have
coordinated exchange rate policies with varying degreesof success since the final collapse of the Bretton Woods
system in 1973, culminating in the introduction of the
euro in 1999. Economic and finance ministers meet regu-
larly in the Economic and Financial Affairs Council
(ECOFIN). Hence, economic competence is relevant not
only domestically at the cabinet table but across Euro-
pean governments as well.
In addition, the creation of the euro also diminished
the overall importance of the domestic foreign minis-
tries in Europe. Traditionally, the Committee of Perma-
nent Representatives (COREPER), whose members come
from the foreign ministries, prepared the Council ofMinister meetings. With the advent of the euro, how-
ever, the Economic and Financial Committee, composed
of representatives from the member state finance min-
istries, replaced COREPER as the key body that sets the
agenda for ECOFIN meetings. Ministers from eurozone
countries also meet separately in the Eurogroup. Hence,
the Economic and Monetary Union (EMU) has elevated
the importance of finance ministers through ECOFIN
and now, increasingly, through the Eurogroup. These
developments lead to expectations about the level of
competence of European economic policymakers, in
particular:
H1: Joining the EU leads to a demand for more
competent ministers who can represent a given
country before economic policymakers from
other countries; the competence level of policy-
makers should therefore increase with member-ship.
H2: EMU increases the competence of finance
ministers.
In the following section we introduce our dataset,
describe selected cross-national patterns and examine
some of the data in relation to these expectations.
2. EU Policymakers in Comparative Perspective
We have collected data on the backgrounds of the
prime minister, finance minister and central bank gover-
nor for 38 countries on a monthly basis for the period
1973 to 2010. We include all 27 EU countries as well as
11 non-EU OECD countries, and we use data from coun-
tries only when they were democracies. There are two
principle ways to examine our data. First, we can analyze
individual policymakers, which is particularly useful for
studying the circumstances that surrounded their
appointment. Alternatively, we can examine the time
share in office of individual policymakers. The latter
approach can be used to assess the dominance of cer-
tain personal characteristics across countries by effec-
tively weighting all individuals by their time in office.Here, we adopt the second approach and compare data
according to country-months instead of per leader. This
yields a total of about 15,000 country-month observa-
tions. We use standard international conventions for clas-
sifying our data. Education codes come from the United
Nations Educational, Scientific and Cultural Organization
(UNESCO, 1997) International Standard Classification of
Education (ISCED).
To begin with general statistics for education, Table 1
compares EU and non-EU countries. For the sake of brev-
ity and exposition, we refer to the non-EU countries in
our sample as the OECD countries in the remainder ofthe article even though a number of EU countries are
also members of the OECD. The first two columns dis-
play the percentage of country-months with a given
type of economic policymaker whose highest degree is
at the graduate (up to a Masters degree) or postgradu-
ate (doctorate or equivalent) level, with any remainder
suggesting less than a graduate degree.1 In aggregate,
there is almost no difference between OECD and EU
countries. The exception is for central bank governors,
with OECD countries having more months (39 versus 30
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percent) of an office holder with the equivalent of a
doctorate.
The third and fourth columns on the field of study are
more interesting. Clearly, there are more country-months
with economic policymakers who have a legal rather
than an economic background in EU countries. Twice as
many EU country-months have a legally trained prime
minister (or president). Moreover, finance ministers have
a slight edge in law over economics in EU countries. The
trend is very different in OECD countries, where the ratiois 55:17. When looking at postgraduate training, the dif-
ference between the two samples narrows somewhat.
Finance ministers have an advanced degree in either
business administration or economics 55 percent of the
country-months in OECD countries, but only 40 percent
of the time in the EU group. This difference is smaller
among the central bankers, although OECD countries
remain somewhat more likely to have economists in this
role.
We also present tables that break down some of the
data by country. Tables 2 and 3 examine the educational
background of prime and finance ministers, respectively.For prime ministers, Table 2 indicates that Germany and
Finland had the longest time with a prime minister in
office with a degree in either the humanities or the
social sciences, while Table 3 shows that German finance
ministers are most likely to have such degrees. For
finance ministers, law backgrounds are most common in
Belgium and Luxembourg. If one considers the original
members of the EU, or the EU-6, their finance ministers
have an economics graduate degree just 22 percent of
the time. Of course, it could be that European finance
ministers are more likely to do advanced degrees in eco-
nomics, which we examine in Table 4. Indeed, our data
show that EU-6 finance ministers have a doctoral equiva-
lent in economics in 32 percent of all country months.
This is right at the average for all countries in our data-
set.
Looking at EU countries, it is noteworthy that Central
and East European countries have a larger percentage of
time in office by individuals with natural science under-
graduate degrees. At the graduate level, 21 percent ofthe time their finance ministers have an equivalent of a
doctorate in economics. There are three countries under
joint EUInternational Monetary Fund supervision in the
summer of 2012, and their backgrounds vary. Greek eco-
nomic policymakers are some of the best educated in
the developed world prime ministers and finance min-
isters in this country have advanced degrees 98 percent
and 90 percent of the time, respectively. Greek finance
ministers have an equivalent of a PhD in economics 58
percent of the time. Portugal is similar prime ministers
have some sort of an advanced degree 81 percent of
the time while the equivalent for finance ministers is 94percent, with that degree being a PhD in economics
fully half of the time. In Ireland the proportions of time
where the prime minister and finance minister has an
advanced degree is 57 percent for both positions, and
just 3 percent of the time does the finance minister have
an advanced degree in economics.
To have a better sense of EU effects, we examined sta-
tistics for the same countries before they joined the
Union and afterwards. We separated them according to
waves of joining the EU, with Greece, Spain, Portugal,
Table 1. Comparison of OECD and EU educational background (% of country-months)
Graduate Postgraduate
Graduate, fieldPostgraduate,EconomicsBus.Econ. Law
Prime ministerOECD 62 27 25 17 19
EU 63 29 19 38 19Finance ministerOECD 57 35 55 17 55EU 61 34 37 39 40
Central bankerOECD 61 39 66 16 81EU 70 30 63 19 74
Source: Official national government sources including parliamentary archives, finance ministry websites and central bank websites;
international institutions including the European Parliament, European Commission, OECD, Club of Rome, European Investment Bankand the UN; biographical encyclopedias, including Munzinger, Britannica and national biographical databases; personal websites of
politicians; newspaper reports. This table presents for EU and OECD countries the percentage of country-months when the relevantindividual was a college graduate, studied law or businesseconomics as a primary field, and received a postgraduate degree in eco-nomics. On the International Standard Classification of Education (UNESCO, 1997) six-point scale, this corresponds to a 5 equivalentto the first level of tertiary education completed (for example, Masters degree in many European countries) as well as a 6 (for
example, PhD).
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Austria, Finland and Denmark in the early wave and the
Central and European countries, Cyprus and Malta in thelate wave. There is an increase in competence among
the early joiners, with the percentage of time of finance
ministers with advanced economic degrees increasing
from 24 percent prior to EU membership to 51 percent
afterwards. In the latter group, however, the results are
reversed finance ministers had advanced economic
degrees 78 percent of the time prior to accession but
only 57 percent afterwards. Still, the post-accession aver-
age for the late wave countries remains somewhat
higher than for the early members.
Table 5 looks at overall levels of education of euroz-
one leaders. There is no difference when comparingprime ministers and finance ministers. There is, however,
a statistically significant difference between eurozone
and non-eurozone members of the EU when it comes to
policymakers with advanced economics degrees, but it
runs counter to our expectation above eurozone poli-
cymakers consistently are less likely to have advanced
degrees in economics.2 This is especially striking for
prime ministers just 1 percent of prime ministerial
months in eurozone countries have had an office holder
with an advanced degree in economics. The trend is also
Table 2. Prime ministerial educational background, university degree, 19732010 (% of country-months)
HumanitiesSoc. Science Economics
BusinessAdmin. Law
ScienceMaths Engineering Other None
Australia* 33 23 0 56 0 0 0 11Austria 28 18 36 32 8 0 0 0Belgium 57 31 0 79 0 0 0 1
Bulgaria 20 33 10 10 21 7 27 0Canada* 32 13 0 62 0 0 0 0Chile* 0 0 4 47 0 28 22 0Cyprus 13 19 0 68 0 0 0 0
Czech Republic 23 31 35 4 3 15 0 0Denmark 22 23 0 32 0 0 0 23Estonia 48 6 0 10 32 14 0 0
Finland 115 1 0 2 0 0 4 0France 51 13 0 36 0 3 11 0
Germany 110 22 0 19 13 0 0 0Greece 8 33 0 95 0 0 1 0Hungary 23 58 0 25 0 0 22 0Iceland* 1 7 5 65 0 18 0 5Ireland 26 7 48 25 0 0 0 8
Italy 10 8 2 75 0 0 0 10Japan* 33 20 8 23 8 2 0 5Latvia 30 30 0 6 60 29 0 0Lithuania 11 23 4 0 18 50 0 0Luxembourg 0 0 0 100 0 0 0 0Malta 0 61 0 92 17 0 0 0Mexico* 0 28 43 29 0 0 0 0Netherlands 22 43 21 35 0 0 0 0
New Zealand* 27 3 5 16 0 0 5 46Norway* 17 30 0 3 0 0 29 22Poland 27 11 4 18 3 30 0 6
Portugal 13 20 9 20 0 38 0 0Romania 37 29 0 35 0 28 0 0Slovakia 3 0 0 55 0 43 0 0Slovenia 29 71 0 0 10 0 0 0South Korea* 28 28 16 28 0 0 0 0Spain 0 0 0 94 0 6 0 0Sweden 32 25 11 0 0 0 2 54Switzerland* 11 21 8 50 0 8 5 3UK 18 0 20 24 30 0 0 8USA* 58 32 0 0 0 0 11 0Total 29 20 7 38 5 6 3 7
Note: This table presents the percentage of country-months a country had a prime minister with the given degree. Because some indi-viduals had several degrees, the percentages may add up to more than 100. An asterisk (*) indicates a non-EU country.
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present, if less dramatic, for finance ministers and central
bankers.
3. Concluding Remarks
There are clear differences in education levels and the
specialization of economic policymakers between EU
policymakers and those from other industrialized democ-
racies. EU prime and finance ministers are more likely to
have legal than economics training, which distinguishes
them from their OECD peers. Among the most recent
accession countries, economic policymakers were better
trained prior to accession than after it. Eurozone eco-
nomic policymakers have essentially the same overalllevel of education as their EU peers outside the euroz-
one, but eurozone prime ministers in particular are much
less likely to have advanced economics training. Among
the exceptions are countries with a high frequency of
financial crises in these cases, the level of economics
training is comparatively high. We speculate that these
countries have little choice but to appoint policymakers
who, at least in terms of background, appear to be
competent. We plan to explore this finding further in
follow-up work.
Table 3. Finance ministerial educational background, university degree, 19732010 (% of country-months)
HumanitiesSoc. Science Economics
BusinessAdmin. Law
ScienceMaths Engineering Other None Unknown
Australia* 0 9 19 45 0 0 5 22 0Austria 0 5 86 11 3 0 11 0 0Belgium 8 1 1 89 0 0 0 0 5
Bulgaria 0 100 1 0 10 0 0 0 0Canada* 48 0 17 51 0 0 0 6 2Chile* 18 0 60 0 0 21 0 0 0Cyprus 0 50 37 25 0 0 0 0 15
Czech Republic 0 29 25 23 6 18 0 0 0Denmark 21 38 19 11 0 9 3 0 0Estonia 11 60 27 0 9 4 6 0 0
Finland 18 3 0 31 0 13 7 23 4France 9 21 1 59 3 19 0 8 0
Germany 74 39 0 28 1 0 0 0 0Greece 13 57 0 30 0 13 0 0 0Hungary 0 63 0 12 0 7 19 0 0Iceland* 16 23 0 36 5 0 9 11 0Ireland 7 13 27 35 0 7 0 16 0
Italy 7 21 11 65 0 0 0 7 0Japan* 8 21 30 41 1 0 0 0 0Latvia 0 39 3 0 35 24 0 0 33Lithuania 14 76 20 0 31 5 0 0 2Luxembourg 0 13 13 87 0 0 0 0 0Malta 11 11 83 21 0 0 0 0 0Mexico* 0 100 0 0 0 0 0 0 0Netherlands 12 71 13 14 0 0 0 0 0
New Zealand* 34 4 18 13 15 0 0 23 0Norway* 15 26 21 12 0 0 6 20 0Poland 0 75 24 0 0 1 0 0 0
Portugal 0 66 12 19 0 16 0 0 0Romania 0 50 40 0 3 5 0 0 10Slovakia 0 84 0 0 8 29 5 0 0Slovenia 0 85 0 10 0 0 0 0 10South Korea* 0 37 11 43 0 0 0 0 18Spain 0 73 0 51 8 5 0 0 0Sweden 31 19 8 5 0 0 25 23 0Switzerland* 16 50 0 3 0 21 0 11 0UK 60 7 0 34 0 0 0 3 0USA* 50 35 7 5 0 4 0 0 0Total 16 34 16 27 3 5 3 6 2
Note: This table presents the percentage of country-months a country had a finance minister with the given degree. Because someindividuals had multiple degrees, the percentages may add up to more than 100. An asterisk (*) indicates a non-EU country.
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This article focused on describing meaningful differ-ences across countries and time and not on strictly cau-
sal relationships. These findings, however, do lead one
to wonder whether a lack of economics training among
prime ministers and finance ministers has led to deci-
sions in the EU that focus more on legal issues than on
economic sense. One should be careful about pushing
this speculation too far ministers sit at the top of min-
istries with many trained staff. Management skills may in
day-to-day affairs be more important than specialized
knowledge. At the same time, in crisis situations where
time is short, these differences could have an effect on
the decisions leaders take.
Notes
We thank Tim Besley, Scott Gehlbach and two anonymous review-
ers for helpful comments and suggestions. Luca Giapelli, Claudia
Granados, Linnea Kreibohm, Roberto Martinez, Santiago Massons
and Juan Camilo Taborda provided superb research assistance.
1. In many European countries prior to the Bologna process, the
first degree one could receive at the university was the rough
equivalent of an MA.
2. All t-tests are significant at the P < 0.01 level.
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Table 4. Finance ministers with PhDs, 19732010 (% ofcountry-months)
Economics Other None Unknown
Chile* 100 0 0 0Poland 84 0 16 0Mexico* 83 0 17 0
Hungary 63 6 31 0Greece 58 0 42 0Spain 56 35 9 0Portugal 50 7 43 0
Slovenia 44 0 51 5Romania 40 25 30 5Bulgaria 38 0 62 0
South Korea* 37 5 49 9Netherlands 31 0 69 0
USA* 29 0 71 0Slovakia 27 0 73 0New Zealand* 24 0 76 0Lithuania 23 5 71 1Austria 21 16 63 0
Switzerland* 18 50 32 0Estonia 16 0 84 0Latvia 14 3 66 16France 12 4 84 0Cyprus 11 20 61 8Italy 11 32 57 0Czech Republic 9 2 89 0Belgium 8 59 30 2
Luxembourg 8 30 62 0Sweden 8 29 63 0Australia* 2 0 98 0
Canada* 0 7 93 0Denmark 0 0 100 0Finland 0 8 92 0Germany 0 55 45 0Iceland* 0 7 93 0Ireland 0 0 100 0Japan* 0 0 100 0Malta 0 21 79 0Norway* 0 0 100 0UK 0 24 76 0Total 21 13 65 1
Note: This table presents the percentage of country-months acountry had a finance minister with a doctoral degree. Anasterisk (*) indicates a non-EU country.
Table 5. EU policymakers educational levels and advancedeconomics degrees inside and outside the eurozone, 19732010
Primeminister
Financeminister
Centralbanker
Non-eurozone 5.17 (26%) 5.25 (42%) 5.27 (75%)
Eurozone 5.19 (1%) 5.24 (35%) 5.39 (69%)
Note: The first number is the average educational level on the
International Standard Classification of Education (UNESCO,1997) six-point scale, in which 5 is equivalent to the first levelof tertiary education completed (for example, a Masters degreein many European countries) and 6 the second (for example, aPhD). The number in parentheses is the percent of time thatthe office holder had an advanced degree in economics.
Mark Hallerberg and Joachim Wehner14
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Author Information
Mark Hallerberg is Professor of Public Management and Political
Economy at the Hertie School of Governance. He is Director of
Herties Fiscal Governance Centre.
Joachim Wehner is Senior Lecturer in Public Policy at the London
School of Economics and Political Science.
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The Policy Consensus Ruling EuropeanPolitical Economy: The Political
Attractions of Discredited Economics
Waltraud Schelkle
European Institute, London School of Economics
Anke Hassel
Hertie School of Governance
AbstractSince the Great Recession in 2008 academic economics has come under heavy criticism. But a straightforward
alternative is not in sight either. We analyse in this article how the major flaws of applied economics are the mirrorimage of its attractions to policymakers, mainstream political parties and reform-minded administrations. We firstassess what the consensus until recently has been and how it could have been implicated in the crisis. Secondly, weargue, following Hall, that the policy consensus continues to persist because it is politically attractive. The article endswith observations of how the management of the Euro area crisis still shows the attractiveness of the consensus.
Policy recommendations: Introduce greater pluralism in advisory bodies on economic policy to include civil society organizations, such as
trade unions, and consumer organizations as well as academic disciplines other than economics. Review compensation policy for representatives on advisory committees to create a level playing field for experts
from civil society organizations and independent consultants with financial sector lobbyists. Support and back up critical voices in the financial industry and in regulatory bodies against those who defend
regulatory neglect and the privilege of rent-seeking for the financial industry.
1. Whose crisis?
Since 2008 crises in financial markets have forced gov-
ernments to unprecedented monetary and fiscal inter-
vention, unprecedented both in scale and degree of
coordination. Sovereign debtors are under sustained
attack by financial markets for their poor growth andpitiful public finances that the crisis of 20082009 gener-
ated. Governments are desperate for advice on how to
stop contagion and a new recession. The situation is par-
ticularly difficult in Europe where the future of the Euro-
pean Union (EU) and the common currency in particular
are at stake. This seems a pertinent moment for taking
stock of what the economic policy consensus of the
recent past has been, whether it is to blame for the
recent crises or whether it can help policymakers now in
their attempts at effective crisis management.
In similar previous situations, namely the Great
Depression of the interwar years and the stagflation
following the oil crises in the 1970s, the economic policy
consensus of the time came under close scrutiny and
eventually shifted to Keynesianism and monetarism,
respectively. Today, criticism of academic economics is
not in short supply but a straightforward alternative isnot in sight either. The critics and mainstream econo-
mists do not agree even on how to label the consensus
of recent years. The less favourable characterizations
span from privatized Keynesianism (Crouch, 2009) and
neoliberal market fundamentalism (Hall and Lamont,
2011) to macroeconomics based on models of a centrally
planned economy (Buiter, 2009). For evidence of a para-
digm in crisis, the critics can point to over-indebtedness
of households and increasing inequality, but also to the
Global Policy Volume 3 . Supplement 1 . December 2012
2012 London School of Economics and Political Science and John Wiley & Sons Ltd. Global Policy (2012) 3:Suppl.1 doi: 10.1111/1758-5899.12012
Research
Article
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unravelling of institutional fundamentals such as central
bank independence.1
In defence, mainstream economics can point out that
they explore market imperfections and outright failure in
controlled variations of the perfect-competition-full-flexibility
benchmark (for example, Smets and Wouters, 2003). The
use of the consensus model by many central banks and
supranational, applied research outfits proves that macroec-onomists are not only scientists but also engineers engaged
in fixing real world problems (Woodford, 2009). The defend-
ers are bolstered by the fact that the lessons, which govern-
ments seem to have drawn from the various crises, suggest
that the economic policy consensus of the last two decades
is less obsolete than the critics think. As before, suprana-
tional policy reports and summit conclusions end with calls
for structural reform, budget consolidation and commit-
ment to price stability. Global financial regulation is still
orchestrated by men in grey suits meeting in Basel and
relies heavily on the same old instrument of (modest if
somewhat raised) capital requirements. Put less favourably,
a distinct possibility is that mainstream economics is a
pathology (Hay, 2011) that simply lingers on without killing
the patient outright.
But what does the consensus consist of? Those who
see the financial crisis also as an ideational or intellectual
crisis tend to characterize mainstream economics as the
embodiment of neoliberalism that assumes that markets
get it right. Those who acknowledge that there may
have been some oversight but that there is no alterna-
tive to the new synthesis insist that there is a well-devel-
oped analysis of market failure in mainstream economics
and it merely has to be updated in light of the new
experience. An alternative to both, for which we arguein this article, is the position that accepts that it was not
neoliberalism that got into crisis but a synthesis of neo-
classical and new Keynesian economics that takes market
failures into account; yet the alternative also concedes
that the policy consensus has serious flaws that made it
overlook all the factors leading up to this crisis, such as
systemic risk.
2. New Keynesianism and neoliberalism theargument in brief
Our contribution addresses the policy consensus on theEuropean political economy in one fundamental way. In
much of the writings on the shift from the post-war
golden years to a new economic paradigm after the late
1970s, the contrast is drawn between the Keynesian wel-
fare state on the one hand and neoliberalism on the
other hand.2 Many political scientists and political econo-
mists therefore portray mainstream economics, its policy
advice and the politics of market regulation as if it was
under the spell of a decidedly neoliberal thrust (for
example, Hay, 2011; McNamara, 2006; Stiglitz, 2008).
We think that this contrast is flawed. Keynesianism has
not given way to a neoliberal agenda but to a new
Keynesian-neoclassical synthesis that took price and
wage rigidities into account, as a fact of economic life,
with costs and benefits. The new Keynesian macro-eco-
nomic policy that followed from it combined activist
inflation targeting with structural supply-side policies,
which means policies that aim at changing certain insti-tutions like employment protection or wage-bargaining
patterns.
Structural supply-side labour market policies are fre-
quently seen as a defining element of neoliberalism.
Activation, in the sense of privatizing the responsibility
for finding a job, in contrast to an active labour market
policy, was therefore seen as a cornerstone of a neolib-
eral agenda that abandoned the Keynesian welfare state.
However, we argue that the turn to supply-side labour
market policy was a response to political demands of
core electoral constituencies rather than the biggest
parcel in a neoliberal package.
In other words, both trends the change in labour
market policies and the demise of the Keynesian welfare
state went in parallel and were even connected, but
not because of a macro-economic paradigm that was
dismissive of the welfare state as such. At first glance,
this difference sounds overly subtle, but we maintain
that it helps us to understand the persistence of the
policy consensus even after the financial crisis.
A challenge to our view is Crouchs interesting hypoth-
esis that the distinction between new Keynesian macro-
economic policy and a supply-side policy agenda can
explain why neoliberalism did not die (Crouch, 2009).
Crouchs answer is to claim that private Keynesianismsucceeded the Keynesian welfare state, which kept
demand steady and helped neoliberalism to continue
even though it meant a harsher economic environment
for the working population. He maintains that the Key-
nesian system of public demand management was not
followed by a neoliberal turn to pure market rule, but
rather to market liberalism combined with extensive con-
sumer debt incurred by low-income and medium-income
households (Crouch, 2009, p. 382). Privatized Keynesian
demand management thus helped to maintain the
rather unpopular and unwanted neoliberalism and
liberalization.We argue that new Keynesianism and supply-side poli-
cies interact in a somewhat different way. First of all,
privatized Keynesianism, as portrayed by Crouch (2009),
is not demand management at all but a reinforcement
of the pro-cyclical movements of market demand. The
new Keynesian policy consensus meant, above all, a
move from the macro-level to the micro-level of eco-
nomic management. This micro-level economic manage-
ment addresses the supply side of the economy, that is,
price and wage rigidities. It also tackles the denial of
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market access for certain consumers that is supposedly
caused by a lack of competition between financial pro-
viders. However, liberalization cannot be sustained on a
purely ideological basis for long. Policymakers must be
seen to solve labour market problems and thereby
respond to political demands by the electorate. We sug-
gest that this is what the synthesis model delivered and
why even a flawed model of new Keynesian policy-making became entrenched in our political system.
In the following, we will assess what the consensus
until recently was and what its potential flaws were.
Next, we explore what made the consensus attractive. In
this, we follow Hall (1989, pp. 370375), who proposed
that the political power of economic ideas requires, at a
minimum, their economic, administrative and political
viability. That is to say, ideas must resolve economic
problems deemed pressing and relevant by policymak-
ers; they must be in accord with bureaucratic practices
and not overstretch implementation capacities; and they
must appeal to broader constituencies and possibly
allow policymakers to forge new coalitions. We conclude
that, paradoxically, the flaws could be the flip-side of
what made the consensus attractive, in particular to
European governments with their perception of pressing
low employment problems.
This is followed by an assessment how the economic
policy consensus worked in practice and may have actu-
ally contributed to the crisis. The obsession with labour
market reforms made policymakers miss the gathering
storm in financial markets. The contribution ends with
our observations of euro area crisis management that
shows that the discredited economic consensus is still
alive and well. The formation of politically cross-cuttingcoalitions that aim at defending the real economy
against financial havoc has only started to form and the
jury is still out on whether it will succeed.
3. What was the economic consensus of thelast two decades?
This section presents the main elements of the work-
horse model of mainstream macroeconomics, that is not
its theoretically most advanced version but the analytical
worldview with which applied economists are brought
up. This workhorse model is called the new neoclassicalsynthesis or new Keynesianism; labels that can be used
interchangeably, as we argue below.3 It is necessary to
recall the basics because we want to revisit the critique
from within that accuses the economic mainstream of a
naive trust in markets and an obsession with general
equilibrium in a complete market system (for example,
Buiter, 2009; Krugman, 2009). These informed critiques
are often taken up in more popular versions as the neo-
liberal policy consensus in ideology and practice. In
our view, the new mainstream has been much more
interested in market imperfections and their policy impli-
cations than the critics acknowledge. This raises the
question whether the economic policy consensus is at
all to blame for the crisis. If it is to blame, we are in dee-
per trouble than even the critics think. It simply will then
not do for economics to take account of the real world
if that is what they already did.
The workhorse model for economic policy-making
The consensus model has three building blocks (Carlin
and Soskice, 2006, pp. 8190). In the first, aggregate
demand (household consumption and possibly firm
investment) are determined as resulting from income
and the real interest rate it is the conventional IS curve
of the old neoclassical synthesis. In the second, the sup-
ply-side of the economy is characterized as resulting
from wage and price setting in imperfectly competitive
labour and commodity markets this is the resurrected
Phillips curve in a form that has absorbed the monetarist
critique. This supply side determines a natural rate of
unemployment, given the structural and institutional fea-
tures of the economy, such as transaction costs and cor-
poratist arrangements that keep it from attaining full
employment. In principle, this long-run equilibrium is
compatible with any level of nominal prices. So we need,
finally, a monetary rule that gives the economy a nomi-
nal anchor and gets it back into a low-inflation equilib-
rium after a shock. The central bank uses the interest
rate, not money supply, which is the defining difference
from monetarism. The rule describes the monetary
authoritys preferences over the inflationunemployment
trade-off that characterizes the supply side of theeconomy.
How does a capitalist economy work in this stylized
depiction? The standard situation is that the economy is
in its long-run equilibrium and then hit by a shock, that
is, an exogenous disturbance in demand (a change in
investment or consumption) or in supply (a change in
input prices), which pushes the economy off track. Since
the natural (un-) employment rate is determined by
wage andor price setters, this leaves only inflation as a
choice variable for policymakers (Akerlof et al., 1996,
p. 1), typically with zero as the optimal inflation rate.4
The central bank perceives shocks as making the econ-omy deviate from its inflation target. If then prices rise
more, the central bank must raise the interest rate (or
vice versa), which reduces the demand for credit that
would sustain the existing level of investment and con-
sumption. Higher unemployment will dampen wage and
price increases, depending on the features of the labour
and product market such as employment protection or
costs of price adjustment that determine short-run
trade-offs between inflation and employment. The cen-
tral bank moves the economy along these short-run
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Phillips curves back to the long-run equilibrium. The
more inertia there is in price and wage setting, the
longer this will take and the more unemployment will
be necessary to force down inflation. From the point of
view of the central bank, the supply side (the Phillips
curve) is thus the constraint on its stabilization policy
while the demand side (the IS curve) is the transmission
channel through which monetary policy works.The first observation that will strike most readers is
the central role of monetary policy for the working
and stabilization of the economy. The first surveys of
Goodfriend and King (1997) and Clarida et al. (1999)
codified the macroeconomic consensus by pointing out
the role of monetary policy in it. The consensus could
be formulated without any reference to fiscal policy.5
The new synthesis considers fiscal policy to be distort-
ing, determined by a political process and thus ruled
by other than efficiency considerations (Goodfriend and
King, 1997, pp. 237, 245, 280). In their extensive survey
of the new Keynesian consensus on the conduct of
monetary policy, Clarida et al (1999 p. 1702) mention
fiscal policy only once, namely, when they note that in
a low inflation environment, nominal interest rates may
hit the zero bound and so the important open ques-
tion arises as to whether cooperation from fiscal pol-
icy is necessary (p. 1702). It would probably have
perplexed Keynes to find that this is considered an
open question by economists who align themselves
with his name.
Monetary policy here is activist (Goodfriend and King
1997, p. 256), in the sense that the central bank does
not simply wait and see after a disturbance. But the
monetary authority is also not pro-actively seeking toshift the long-run equilibrium this is the role left for
government and their structural reforms of labour and
product markets. The monetary rule is therefore a
response function, summarizing (averse) preferences over
inflation and unemployment. A central bank with high
preferences for price stability chooses a radical disinfla-
tion strategy even if costs in terms of employment are
high, and chooses a more gradualist one if it is less
inflation-averse.
An activist central banks own preferences over the
short-run Phillips trade-off that capitalist economies face
imply a credibility problem. This arises when the centralbank is more unemployment-averse than wage and price
setters and can manipulate the very constraint it faces,
here: inflation expectations. This difference in prefer-
ences seems to be a far-fetched assumption, given that
central bankers are not normally recruited from the rank-
and-file of trade unions. The rationale offered is that
even independent central banks may come under pres-
sure from governments with an inflation bias (Carlin and
Soskice, 2006, p. 167). This has allowed intense study of
how a central bank with an inflation bias can be com-
mitted to price stability, and was extremely influential in
the design of the European monetary union (Blinder,
1997; Schelkle, 2006).
The consensus as synthesis
In what sense does this amount to a policy consensus
and a new synthesis of once opposed schools of macro-economic thought, Keynesianism and monetarism? In
methodological terms, mainstream economists have
come to accept most of the critique that neoclassical
macroeconomists, from Milton Friedman to Robert Lucas,
launched against the old neoclassical synthesis, meaning
the pump-priming of the IS-LM model. Expectations
must not be treated ad hoc but given careful thought,
which has been turned into the stipulation that expecta-
tions must be rational in the sense of model-consistent.6
This has been generalized to a call for micro-founda-
tions; that is, all macroeconomic relationships and
responses must be grounded in individually rational
behaviour that translates into aggregate behaviour. The
synthesis makes extensive use of the eternally living rep-
resentative agent that optimizes over an infinite time
horizon. It is the basis for dynamic stochastic general
equilibrium models that many central banks and the
European Commission now use (Buiter, 2009).
In substantive theoretical terms, adherents of the syn-
thesis accept the crucial role of monetary policy for stabi-
lizing the economy and that even in the presence of
under-employment, inflationary pressures may arise. It is
a moot point which school of thought compromised
more here. Monetarism and its offspring, real business
cycle theory, claimed that the central bank should simplyfollow a strict money supply rule that endows the econ-
omy with enough additional transactions media to grow
at price stability. This has been replaced by an inflation-
targeting central bank that uses the interest rate actively
to stabilize an economy prone to shocks. At the same
time, (macro) economists have adopted the monetarist
lens of the central bank that grasps the entire macro-
economy by adding the reinterpreted Phillips curve as a
constraint on its policymaking. The Phillips curve is now
an aggregate supply curve fixing output and equilibrium
employment in the long run and the adjustment path in
the short run. It makes labour and product markets ulti-mately determine equilibrium while financial markets
play only a residual role.7 One can thus argue that,
strictly in terms of economic theory, the notion of a neo-
classical synthesis is more pertinent while the policy
activism of the central bank can be characterized as Key-
nesian. The terms can thus be used interchangeably,
depending on whether the authors want to stress the
supply-side determined, natural equilibrium or the real-
istic imperfections that can give the demand side and
monetary policy a lasting influence.
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The reconceptualization of the price mechanism is the
most relevant example to illustrate what a rich research
programme opened up thanks to this synthesis: the
evidence from mature economies suggests that firms are
not price takers but price setters in markets for less than
fully substitutable goods or brands, that is, in monopo-
listically competitive markets (Akerlof et al., 1996, p. 21;
Goodfriend and King, 1997, p. 249). The price settingthat corresponds to this form of competition, namely
mark-up pricing, can grasp a rich set of economic phe-
nomena, such as pricing-to-market in volatile markets
and smoothing over the business cycle. In contrast to
marginal cost-pricing in atomistically competitive mar-
kets, it provides a surplus that can be the subject of
negotiations with organized labour. Inflation can thus
arise from distributional conflict [among] different social
groups held only in check by a credibly inflation-averse
central bank (Carlin and Soskice, 2006, pp. 133134,
160168).
Its flaws in general
Our overview of the economic policy consensus before
the crisis contained three possible candidates that may
be relevant to the question Whose crisis that of neo-
liberalism or of something called new neoclassical
synthesisnew Keynesianism? It may be helpful to sum-
marize them briefly at this point, mainly to show that
what could be dismissed as rather esoteric squabbles
among academics before the crisis might be serious
flaws contributing to the crisis from hindsight.
At the most obvious level, we agree with the critics
of mainstream economics that the underlying bench-mark of a dynamic general equilibrium is a problem
(see Prosser [2006] for a particularly insightful critique).
This reference point gives the impression that the
enlightened Visible Hand can shift the economy gradu-
ally and continuously towards this benchmark by get-
ting rid of rigidities, by aligning incentives through
more transparent information and by allowing for the
emergence of missing markets through permissive regu-
lation. Financial markets cannot alter this underlying
equilibrium; if anything they should facilitate its attain-
ment. This is the source of the label, market fundamen-
talism for the trend in economic policy over recentdecades (Hall and Lamont, 2011). It also paints a much
more optimistic image of capitalist economies than we
can find in Keynes (1936). In this mainstream economics
perspective, capitalist economies may be full of micro-
economic imperfections but they have no systemic
flaws. Market adjustment may work imperfectly but it
does not work perversely, as Keynes (1936, p. 291)
maintained for a situation of deflation, to be outlined
presently, and Shiller (2003) claimed for a situation of
asset market bubbles.
Secondly, the micro-foundations agenda, while seem-
ingly esoteric to non-economists, served to restore the
superior role of price adjustment. Only non-economic
explanations, such as political forces (insider power) or
psychology (the representative worker resents inequal-
ity), can make sense of real rigidity, for instance wage
earners resisting wage cuts even when faced with rising
unemployment. This goes directly against the Keynesianproposition that quantity adjustment may trump price
adjustment in capitalist economies and that this may be
functional. For the latter, take the case of why market
forces cannot lead an economy out of deflation: even if
unemployment has risen, there may be no tendency for
real wages to fall. Rising unemployment makes desper-
ate workers to offer their services at ever lower wage
rates while desperate firms lower prices to sell the goods
they already produced. But if both wages and prices fall,
then real wages stay roughly constant and in any case
do not necessarily fall as much as needed to make firms
keep their work force, let alone hire more workers at
lower nominal wages. Thus, the synthesis does not con-
sider the case that nominal flexibility can generate real
rigidity, and arguably suffers from a fallacy of composi-
tion. It takes the whole for its parts, here: by assuming
that both wages and prices are rigid while they can be
both flexible, making the whole rigid.8 In macroeconom-
ics, (nominal) flexibility can be the problem rather than
the solution. But the micro-foundations agenda is based
on the premise that macroeconomics is not a field of
study in its own right because the whole is equal to the
sum of its parts, neither more nor less. This is too strong
an assumption, as Keynes (1936, pp. 358361) illustrated
also with his paradox of thrift9 and social choice theo-rists like Thomas Schelling (1978) have confirmed since
then.
Finally, the consensus model has a sensible take on
the Phillips curve, namely that it may exist but it cannot
be exploited (Carlin and Soskice, 2006, p. 75). Yet, by
making it the prime constraint on monetary policy and
macroeconomic stabilization generally, it focuses all
attention on labour and commodity markets. Financial
markets come in only as an afterthought regarding the
transmission of monetary policy. Policymakers were busy
looking under the lamppost of the new synthesis for yet
another necessary structural reform while financial bub-bles were allowed to grow. This was despite the fact
that there have been plenty of warnings about asset
market bubbles (even Alan Greenspan admitted that
there may be irrational exuberance in financial markets),
yet the moment passed after markets rebounded after
the 2001 crash. By concentrating on markets for (the
flow of) services and goods, there was an in-built analyti-
cal bias against considering the catastrophic stock flow
dynamics resulting from asset and debt accumulation.
These dynamics would come to trump any rigidities in
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labour and commodity markets upon which inflation
targeters and structural reformers so obsessively concen-
trated.
4. What were the attractions of this economicpolicy consensus?
The flaws of the new synthesis did certainly not dimin-ish its political attractions. They may even have contrib-
uted to its attraction, which we can understand
following Hall (1989) by assessing its economic, adminis-
trative and political viability. He synthesizes three
approaches. There is, firstly, an economist-centred
account that claims it is expert advice in government
that gives economic ideas powerful influence; which is
typically proposed by academics who served for some
time in government or in a central bank (recent exam-
ples can be found in Bussire and Stracca, 2010). Sec-
ond, a stat