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)

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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

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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

Mark Hallerberg and Joachim Wehner10



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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).

Economic Policymakers11



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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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Impact of Political Leaders Profession and Education on

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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.




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tional Background of Central Bankers and Its Effect on Inflation:

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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


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

Policy Consensus17



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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

Waltraud Schelkle and Anke Hassel18



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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.

Policy Consensus19



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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

Waltraud Schelkle and Anke Hassel20



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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

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Changing the Debate on Europe