European Institute for International Economic Relations
Prof. Dr. Paul J.J. Welfens is a Geoeconomics Non-Resident Senior Fellow at AICGS. He is Jean Monnet Professor for European Economic Integration; chair for Macroeconomics; president of the European Institute for International Economic Relations (EIIW) at the University of Wuppertal; Alfred Grosser Professorship 2007/08, Sciences Po, Paris; Research Fellow, IZA, Bonn; and a Non-Resident Fellow at AICGS/Johns Hopkins University, Washington DC.
At 96 years of age, Helmut Schmidt, former Chancellor of Germany and respected elder statesman, passed away on 10 November 2015, in Hamburg. He had been active in the German Parliament from 1953 to September 1986—serving as Germany’s fifth chancellor from 1974 to 1982. In the economic field he successfully dealt with the two oil price shocks of the 1970s, but he also witnessed the new problem of stagflation and rising debt-GDP ratios in the context of Keynesian expansionary policy. That approach was not ideal in a setting with supply-side shocks, but in the late 1970s Schmidt resisted the U.S. president’s call for bigger fiscal policy expansion: While President Jimmy Carter argued that Germany should play the role of a locomotive in the OECD area, Helmut Schmidt rightly argued that even a strong expansionary fiscal policy on the part of Germany would generate only a rather limited international real income effect, at the same time the rising debt burden associated with high deficit-GDP ratios would have to be faced by Germany alone. Helmut Schmidt also fought terrorism in Germany with much determination.
In the late 1970s, Chancellor Schmidt pushed for NATO’s double-track decision to modernize capabilities in terms of medium-range atomic missiles in order not to face Soviet blackmail leverage in the context of the modernization of Soviet medium-range missiles. The deal offered to Moscow was that the West would reduce the new medium range arms stock once Russia signed a program for disarmament with its own medium range missiles.
Beyond this impulse for NATO’s strategy, Helmut Schmidt is known for his initiative to create G6/G7 meetings in 1975 when the first summit took place in the castle of Rambouillet, close to Paris. The French prime minister Valéry Giscard d’Estaing had also embraced this idea early on and he, in 1978, submitted a joint initiative for launching the European Monetary System in 1979—which effectively created a D-Mark zone that after several stages of institutional adjustment would, in 1999, become the starting point for the euro and the European Central Bank.
I have had the pleasure of meeting the former chancellor on several occasions, the first time being in 2000 when the Department of Economics and Social Sciences at the University of Potsdam conferred, following my proposal, an honorary doctoral degree on Helmut Schmidt. By then he had already been awarded some twenty honorary doctoral degrees from foreign universities, but not a single one from a German university. As he was a trained economist and had at one time been minister of finance—and for a short period also minister of economic affairs—in the government of Willy Brandt, and later chancellor himself from 16 May 1974 to 1 October 1982, there were good reasons for such a special award. My faculty, which had newly been created after German reunification at the University of Potsdam, was quite pleased that the former chancellor was willing to accept this honorary doctoral degree. It was a great experience for me to later serve, along with Horst Siebert from the Kiel Institute for World Economics and several other European experts, at one of the InterAction Council meetings—in Paris—which brought together retired prime ministers from OECD countries. The meeting was on economic globalization and the summary report, informally submitted to various governments, suggested that globalization raised certain challenges, including considerable structural change and a larger role of internationalized financial markets, but that governments should not make the long term globalization process a scapegoat in the political arena: Globalization could not be blamed for low growth or for rising unemployment. If the process of globalization would be shaped by adequate international rules there was not much reason for concern. In reality, as it later turned out, the respective politicians in leading OECD countries did not adopt adequate rules, particularly not in financial markets and banking. Interestingly, in 2004, Schmidt published a book on economic globalization in which he warned of upcoming western financial instability. Too much speculation and insufficient prudential supervision of banks were challenges that Helmut Schmidt had identified as two critical elements of the global financial order—an assessment that turned out to be quite prescient.
In his acceptance speech for the honorary degree in Potsdam, Helmut Schmidt emphasized the importance of European integration and economic stability in modern market economies. At the same time, he underlined his skepticism over the fact that too many countries from Eastern Europe were to be integrated at the same time: The enlargement, scheduled for 1 May 2004, related to eight countries from Eastern Europe plus Malta and Cyprus and seemed, to Schmidt, to be too big a leap. The former chancellor, who after retiring from active politics became a senior co-editor of the Germany weekly DIE ZEIT, argued that a “too fast, too broad” eastern enlargement could undermine the stability of the overall European Union. Given the large differences in per capita income and institutional settings of old and new EU countries, Schmidt would have preferred several smaller steps of eastern EU enlargement, taking on board only a few countries at the same point of time.
Some of the political friends of Helmut Schmidt had a similar political career to Schmidt, whose first position in Bonn had been in the role of the minister of defense, then he became minister of finance, and then chancellor. In Australia, Malcolm Fraser had followed a very similar path and it turned out that the clarity of principles emphasized by Fraser was very similar to the typical reasoning of Helmut Schmidt. At the meeting of the InterAction Council in Paris, I learned from then retired Australian premier Malcolm Fraser that he had pushed hard on U.S. president George H.W. Bush, during his visit to Australia, not to take sides with Argentina in the Falklands conflict. On the day before a critical U.S. Senate meeting, Bush called Washington from Australia in order to switch the previously taken position—following the logic of the Monroe doctrine that Europeans should keep out of Latin America— that the U.S. would support Argentina in this conflict with the UK. Fraser had very much emphasized that the democratic system of the U.S. could not support the Argentinian military junta, nor would it be adequate that the U.S. would distance itself from its most crucial military alliance partner, the UK. The next day, Argentina’s government was quite surprised to learn that the U.S. Senate Committee on Foreign Relations had reversed its earlier position: The U.S. would no longer support Argentina’s position.
Following the U.S. call for a taming of intra-NATO tensions, Germany, under Helmut Schmidt, was once crucial in avoiding a war within Europe and the NATO area, respectively. In the mid-1970s, the Federal Republic of Germany’s government followed U.S. suggestions and gave German military equipment—including tanks—to Turkey as a means to discourage that country from going to war with Greece. The influential Turkish military bowed to the mixture of pressure from the U.S. and gifts from the West German government. Under Schmidt, Germany’s relationship with the U.S. administration became rather difficult during the presidency of Jimmy Carter. The political relations were so poor that the German government started to use a back-channel to the U.S. administration: The Friedrich Ebert Foundation, which was very close to West Germany’s Social Democratic Party of Helmut Schmidt, several times had to pursue informal discussions with high-ranking representatives of the U.S. administration in order to find a useful compromise between Germany with the U.S. Helmut Schmidt was afraid that the soft political rhetoric of Carter vis-à-vis the Soviet Union was giving doubtful signals to the big communist military power in Europe.
After Schmidt had retired from active politics he almost never gave any public advice to the respective German government of the day. Only at a Social Democratic Party convention immediately prior to the Kosovo War did Schmidt clearly state that he would not recommend any intervention by Western countries in the Kosovo War unless there was a clear UN mandate for such an intervention. As regards Germany’s military outreach in the context of Western intervention in Afghanistan—and the option for joining the U.S. in its Iraq War—the former chancellor was skeptical about involving Germany’s armed forces in any military operations far away from Europe.
As regards EU integration, the former German chancellor was quite convinced that too fast an eastern enlargement was as much a major problem as the lack of monetary integration in the EU. Such a common currency—already envisaged in the Werner Report of 1970—in the form of a euro pillar, seemed for him to be a necessary complement to the EU single market. While the first decade of the euro zone was a rather successful period of integration, the years immediately following the serious transatlantic banking crisis of 2008/09 were characterized by the euro area crisis. Schmidt argued that there was in fact no euro area crisis, rather there were national debt crisis problems in Greece, Ireland, Portugal, and Cyprus, and a banking problem in Spain. By mid-2015, several reforms had been adopted in these countries and the euro area, respectively. Only Greece remained a major problem with its unsustainable debt-GDP ratio; however, with the refugee crisis of 2015, Greece might gain enough political leverage to obtain some form of effective debt cutting sooner rather than later.
A field which was of particular interest to Helmut Schmidt, a fact that is not well known to the general public, concerns the philosophical background for economic policymaking. Schmidt was interested in learning from Immanuel Kant and Max Weber; and even more so from Karl Popper, the eminent philosopher from Vienna, on how best to implement reforms in a democracy. Popper is known for his book “The Open Society and Its Enemies” which was published in 1945 as the fruit of years of work in exile in New Zealand. Karl Popper had a long communication with Helmut Schmidt in the form of letters and some personal contacts. Piecemeal-engineering was the strategy recommended by Popper, who had emphasized the limited ability of scientists to analyze the real world. Another crucial book of Popper’s, who taught at the London School of Economics after the Second World War, was the early study “The Logic of Scientific Discovery”—the original German version of which was published in 1934. This important book, which makes a clear distinction between the concept of a scientific truth (in the sense of a hypothesis which has been corroborated by empirical evidence) and religion, has thus far not been translated into the Arabic language; such a translation is urgently needed given all the political confusion in parts of the Arab world.
The terror attacks by the radical left-wing RAF group in 1977 were clearly aimed at destabilizing the Federal Republic of Germany. Schmidt stood firm against such terrorism. The new tragic terror attacks in Paris on 13 November 2015, were also trying to undermine the open society of the European Union. There is no doubt that in such a situation Helmut Schmidt would be very much in favor of full solidarity with France; at the same time, he would probably have pushed for a mixture of limited military intervention by certain allied forces in Syria while also pushing strongly for more international political cooperation (moreover, a critical dialogue with Saudi Arabia is needed: one may point out that in Bonn there is a school financed by Saudi Arabia that uses some strange textbooks in which the killing of non-Muslims is praised—this fact was made public by DER SPIEGEL years ago, unfortunately, however, Joschka Fischer, then foreign minister of Germany, did not have the courage to protest against this strange radicalism).
Helmut Schmidt was quite aware that many economic problems required a long-term approach and international cooperation. In this context, Schmidt emphasized for many years that China’s role would be growing over time and that a future international monetary order would most likely be shaped strongly by the U.S., China, and the EU. Along with this perception, there was also clearly the idea that the central banks of the U.S., China, and the euro zone would increasingly cooperate in the twenty-first century, however, the logic of international cooperation would be shaped by national political interests—political realism was considered by Schmidt as crucial.
The fact that Germany’s authorities in Hannover cancelled the Germany-Netherlands soccer game on 17 November 2015—about one hour before the game was due to start—is inadequate. That the game was definitely due to go ahead had been announced by the German Soccer Federation as a testament to the determination of modern civilization in that we would not bow to IS-inspired terror. Helmut Schmidt, in such a situation, might have invited 20,000 soldiers from Germany and the Netherlands to attend the soccer game. The ball must keep rolling and if Europe is attacked then we Europeans must really hold together and not give in with regard to the key fields of values and the activities of daily life. Clear leadership is needed. At least in Brussels all EU countries have pledged solidarity with France, calling for military support and France should enjoy it for many years—as long as is necessary to restore a peaceful and safe Europe and indeed global economy. In the current situation it is also necessary that a careful dialogue between people in European, Arab, and (other) G20 countries be established in order to achieve a peaceful cooperation of cultural and religious groups: Mutual respect, tolerance, and joint efforts to stabilize the climate should be elements of this new effort. The protocol of the Conference on Security and Cooperation in Europe—established in the 1970s—needs a follow-up initiative in a new framework. As regards high youth unemployment rates in the EU, France and Belgium have had very high figures or decades and this is obviously related to high minimum wage rates in these countries. High youth unemployment rates often contribute to political radicalization. As Helmut Schmidt once pointed out with respect to Germany, that adequate regional differentiation of wages is necessary. The conclusion is: Big countries such as Germany and France need regional minimum wages. Fighting terrorism has many aspects—high youth unemployment is one of them.
Prof. Dr. Paul J.J. Welfens is President of the European Institute for International Economic Relations at the University of Wuppertal (EIIW), Jean Monnet Professor for European Economic Integration, and Chair for Macroeconomics. He is a Non-Resident Fellow at AICGS. His newest book is entitled Towards Global Sustainability (Heidelberg/New York: Springer, 2015).