White knight

The German response to GM’s bankruptcy underscores the slight but remarkable difference in economic thinking on the two sides of the Atlantic.

Anticipating GM’s financial failure, the German government moved quickly to guarantee financing for the purchase of Opel, a German car manufacturer that was acquired many years ago by the American automaker. Government financial guarantees paved the way for the acquisition of Opel by a consortium led by a Canadian car parts manufacturer, Russian financiers and the German Commerzbank.

Justifying her government’s apparent intervention on behalf of that deal, German Chancellor Angela Merkel argued that jobs needed to be saved. The crisis, she went further, was the fault of American moguls, not German workers. The workers ought to be spared the penalties for corporate mistakes.

For Americans, especially Republicans, who tend to hold on to a caricature of laissez-faire that any form of government intervention in the market is the equivalent of “socialism”, Merkel’s remarks might have sounded strange. The German chancellor is, after all, leader of the conservatives whose economic policies are decidedly pro-market. She is a leader in the mold of Helmut Kohl.

The policies taken by the German government in the case of Opel is not an isolated one. Earlier, the French government moved decisively to save the car company Renault. All over Europe, governments did exhibited little ideological hesitation in nationalizing troubled banks when the health of the larger economy.

During the G-20 summit in London earlier this year, the French and the Germans tangled with the British and Americans over the matter of enhanced regulation of the financial sector. The British and the Americans held tightly to the idea that the financial sector, despite all that had happened the past year, ought to remain largely unregulated. That laissez-faire condition brings about the efficiency of the financial institutions.

Had Washington, during the Bush era, thought a little more like the Germans, Lehman Brothers might have been saved and the financial crisis might have turned out less severe than it did. But the Bush-led Republicans held on to a caricature of the free market and allowed what they considered a “shakeout” to happen. To this day, the most orthodox Republicans are picturing the Obama administration’s economic policies as an indication that the US is going the way of Cuba.

In order to understand the basis for the German response to the symptoms of the financial crisis, we will have to refer to the theoretical tradition of the Christian-Democratic movement in Europe. This theoretical tradition is described alternately as the “social market economy” or “ordoliberalism.”

This tradition has its roots in the thinking of Ludwig Erhard, who was director of economics in the US-British occupation zone after the war and subsequently rose to become chancellor. His ideas were later elaborated by a group of economists centered on Walter Eucken. The ideas of that group were subsequently referred to as the Freiburg School of economic thinking.

The Freiburg School provides a compass for what is good and what is bad economic policy. It has a very clear definition of the role of the state in society.

What became known, in the post-war period, as West Germany chose capitalism over socialism, private property over state ownership and a free market instead of central planning. On that basis, the idea of a “social market economy” prescribes that the state establish an effective legal environment for private enterprise to flourish, enact policies that enhance competition in the market as well as ensure a certain level of social balance to protect all members of society. Otherwise, the state stays out of the market.

The distinction with plain laissez-faire is that the “social market economy” assigns to the state a vital role in managing the market to the general interest. It is not a dogmatic assertion that, under every conceivable condition, the state should stay away from the market.

In extreme conditions, such as the financial meltdown we have been experiencing for a year now, the state is expected to step in to protect its citizens. It steps in not just to stabilize the situation but to take over enterprises if that is what is required to achieve the objective of social protection.

In a way, the state is assigned a more activist role in the framework of the “social market economy” than in plain laissez-faire thinking. Even during periods of normalcy in the markets, the state is expected to continuously foster competition in the markets, undertake social investments in education and health as well as ensure optimal conditions for job creation.

The “social market economy”, however, must be distinguished from the welfare state model favored by most social democratic parties in Europe. The former has a distinct bias in favor of allowing market forces to operate and discipline the economy. The latter favors permanent nationalization of large sectors of the economy — particularly in the areas of public utilities, transport, health care and education.

The “social market economy” model frowns on nationalization. In its view, nationalization over the long term represents constriction of the market and loss of economic efficiency. Only in times of economic emergency does the state step in, and mainly through state financial guarantees, trusts and regulatory policies that do not involve direct ownership.

This model of the state’s proper role in a market economy is not anything alien to our recent experience in governance.

The model of a “social market economy” provided general theoretical guidance to the social reform policies pursued during the Ramos administration. It is a model of the appropriate relationship between the state and the market espoused here by the Christian-Muslim Democrats.

The essential idea we might value as we try to sort out our economic options at this time is that improved regulatory institutions and the free market are in fact complementary values.