The most significant belief in ordoliberalism is that economies can absorb economic shocks as long as prices and wages adjust

PERHAPS IT is time to learn to love the Germans a little more, or at least try and understand them. It is clear from the rapid progress that M Hollande is making with Frau Merkel that our Gallic cousins’ view of the Germans is a little more sophisticated than the ‘Allo ‘Allo stereotypes we are so find of. And it seems to be working for them.

A good place to start is to try and understand their economic creed a little better. And a very good place to start doing that is a policy brief published by the European Council on Foreign Relations earlier this year called The Long Shadow of Ordoliberalism: Germany's Approach to the Eurocrisis ( www.ecfr.eu).

The authors Sebastian Dullien and Ulrike Guerot dismiss the common perception that Germany’s approach is the product of simple modern-day mercantilism combined with some deep-seated fear of hyper-inflation stemming from the days of the Weimar republic.

Instead they attribute far more influence to the economic thinking that underpinned Germany’s rapid economic recovery after the second World War.

Ordoliberalism has at its heart the notion that governments should intervene in markets to produce the outcome that would have been produced by perfect competition.

It underlays the notion of the “social market economy” which was the short hand for the rapid recovery of West Germany and, according to Dullien and Guerot, “the social market remains one of the most positively charged terms in the German policy debate”.

Ordoliberalism has permeated German academia and from there crossed into the economic ministries and the Bundesbank, which hire mainly from the German universities. It has now manifested itself in several significant aspects of the German response to the crisis.

At the risk of oversimplification, the most significant belief is that economies can absorb economic shocks as long as prices and wages adjust. And the correct response is thus to remove barriers to adjustment rather than stimulate demand. This of course is the austerity we have come to know and hate.

What is more insightful is that ordoliberalism would hold that countries – even in a currency union – need not be concerned about the impact of their economic policies on other states. Instead the onus is on each state to run its affairs properly.

This explains why attempts to pin some of the blame for the Irish boom on the flood of cheap credit from German banks don’t seem to cut any ice in Germany.

This central tenet – that each country must do its own homework – also underlies the view that Ireland must make itself more competitive and there is no onus on Germany to try and be a bit less competitive by allowing higher inflation.

The final point made by the authors is that – paraphrasing again – the German mainstream view is there is nothing wrong with austerity as a response to shocks. The problems only arise when governments lack the will to implement it.

As a result, any bailout mechanism must be structured in a fashion that incentivises austerity. Not only that, but other policy responses such as the European Central Bank buying Irish bonds should be avoided because they negate the market’s ability to punish misbehaving governments.

It is important to point out that the authors don’t debate the merits of ordoliberalism versus other approaches such as Keynesian demand-side policies. The point they are making is that it is deeply ingrained in German political thinking, but not for the reasons you might think. They say it permeates all the mainstream German parties to a greater or lesser extent and even a change of government is not likely to bring about any significant change.

Instead, they suggest we “focus on issues where some movement in the German position can be expected, rather than expect a change on issues on which there is a consensus in Germany”.

They suggest pan-European growth and investment programmes; shifting spending and taxation power towards the European level; and the channelling of unused EU funds into investment programmes for the ailing euro zone periphery.

They also suggest that, instead of opposing balanced budgets, we should look for more time to balance them and that eurobonds are more likely to find favour with the German political elite than ECB interventions.

The similarities between their advice – proffered in February this year – and M Hollande’s shopping list is striking. Clearly the French have been listening to the authors or vice versa.

Either way there must be a lesson for Ireland.