In our empirical analysis, we explore three related questions: a) how German interest groups evaluated different policy options available to achieve external adjustment, internal adjustment, and financing, b) how they chose between different crisis resolution strategies and the inherent trade-offs they pose, and c) how these distributional concerns interacted with ideas and the wider German structural setting to influence German policy choices during the crisis.
How do interest groups evaluate different policy options?
Our argument suggests that interest groups diverge in how they evaluate these strategies because they represent different societal groups with diverging material interests. To test this hypothesis, we presented interest groups in our survey with a set of possible policies that were discussed in policy circles during the Eurozone crisis as options to achieve a rebalancing or to finance deficit states. Because the policy options for internal rebalancing and financingFootnote 11 ranged significantly more widely than the policy options for external adjustment, we presented interest groups with five different options for the former and three options of a Eurozone break-up. Table 1 presents the different options interest groups were asked to evaluate on a scale from 1 (strongly oppose) to 5 (strongly welcome).Footnote 12
Starting with internal adjustment, Fig. 1 shows an overall support for domestic expansion. When we take the average across all policy options (first row), most interest groups generally evaluate internal adjustment positively. Our interviews with major economic interest-groups reinforce this finding. Interest-group representatives from the two major trade unions DGB and Verdi, but also two employer associations, including the highly export-oriented association of the metal industry voiced concerns about Germany’s large current-account surplus (Interviews DE1, DE2, DE7, DE8). Several groups worried about the international implications of the large surplus, including exposure to shocks on foreign markets but also possible political repercussions if Germany failed to reduce the surplus (Interviews DE1, DE2, DE6). Even representatives who rejected the notion that Germany’s large current-account surplus contributed to the Eurozone crisis stated that the German economy had underperformed in terms of private and public investment in recent years and voiced support for specific policies that would serve to counter this trend (Interview DE3). Rather than presenting a unified front in favor of continued trade surpluses, most of the actors we interviewed thus favored policy adjustment that would increase domestic demand and reduce the surplus.
In line with our expectation that interest groups are likely to evaluate different policy options within the same adjustment strategy differently, however, this general support masks considerable divergence in policy evaluations, especially with regard to internal adjustment and financing. With the exception of more public investment, there are clear differences in interest groups’ evaluations of different internal adjustment policies. Whereas, for example, a large majority of trade unions, social policy groups and professional associations viewed a higher minimum wage or more spending on social welfare positively, most employer associations felt that this would be harmful. When it comes to lower taxes for businesses, this picture is reversed. This is also in line with qualitative evidence from our interviews. Both major trade unions we talked to stressed the need to increase minimum wages, to expand the coverage and bindingness of collective bargaining and to re-regulate opt-out clauses and temporary employment contracts (Interviews DE7, DE8). At the same time, they rejected tax breaks for companies or efforts to deregulate the service sector in order to stimulate private investments - the last one being a concern that they shared with representatives of the craft association. Many employer associations, on the other hand, emphasized the expansive effects of corporate tax cuts (Interview DE2), the reduction of red tape in service industries (Interview DE3) or the deregulation of credit provision (Interview DE6). At the same time, most industry groups had fought against the introduction of the minimum wage in 2013 and stated that they would lobby against further attempts to re-regulate labor contracts.
There is one issue that all groups agreed on: the need for more public investment, especially for road and digital infrastructure. However, opinions again diverged on the question how to finance these investments. While trade unions and craft associations demanded financing through public money and possibly new public debts, many employer associations insisted on the introduction of more private-public partnerships, which would also provide new investment opportunities to large institutional investors (Interview DE5, DE8).Footnote 13
We see a similar, though much less pronounced pattern of variation for different financing policies, where the mode is indifference for all financing policies except bailouts, which are evaluated slightly positively. As we will describe in more detail below, our qualitative evidence also supports the finding that most economic interest groups were quite supportive of international transfers.
Finally, variation among interest groups was much more limited with regard to external adjustment: Virtually all interest groups opposed a German exit from the Eurozone, and while there was more variation about the question of whether a deficit country in crisis should leave, all interest groups exhibited a strong preference for avoiding a break-up of the Eurozone. In our interviews, major employer associations and trade unions univocally stated that their members depended crucially on the stability of the monetary union in its current form. Groups in tradable sectors mainly feared that a breakup would lead to unforeseeable exchange rate and market volatilities, disruptions on financial markets, as well as threats to European economic integration more generally. They also mentioned the return of trade barriers as a possible long-term consequence of a Eurozone breakup (Interviews DE1; DE2; DE3). However, even non-tradable sector interest groups, such as those focused on retail or construction, emphasized that a breakup would have extensive negative effects on their members. Main concerns were a general depression of the economic climate as well as higher credit and refinancing costs for their members due to insecurity and friction in the financial markets (Interviews DE5).
What drives differences in policy evaluations?
To what extent do interest groups’ material interests explain this variation in policy preferences? To examine how groups’ exposure to different strategies explain their preferences, we classify groups according to their main sector of economic activity and use this classification to collect data on two measures of exposure: interest groups’ trade dependence and their demand elasticity.Footnote 14 A group’s trade dependence is measured as the share of the output that it exports to other countries in the Eurozone and proxies the degree to which a group would be hurt by a breakup of the monetary union.Footnote 15 For demand elasticity, we assess how much a group would benefit from a general, internal adjustment-related expansion of domestic demand. We focus on the income elasticity of demand for the goods the members of an interest group produce, because it reflects how much increases in aggregate income will affect s the demand for a specific good or service. We construct an ordinal variable that ranges from 1 for very inelastic goods (e.g., food and tobacco) to 6 for very elastic goods (e.g., financial services and personal care activities). The higher the income elasticity of demand for the main good an economic group provides, the more it should benefit from internal adjustment.Footnote 16 Finally, because different types of interest groups represent groups with different material interests, we additionally include dummy variables that capture if a group is an employer association, a professional association, or a trade-union (the baseline are employer associations). Summary statistics for all variables are shown in the appendix.
Figure 2 summarizes the main findings from OLS regression analyses of the correlates of support for each policy option listed in Table 1.Footnote 17 Taken together, our findings suggest that the interest groups’ evaluations of crisis policies reflect real material considerations. For internal adjustment, the analyses show that groups which produce goods and services with higher levels of demand elasticity evaluated internal adjustment policies more positively. Hence, the more groups were likely to benefit from an increase in domestic incomes, the more they supported internal rebalancing. Moreover, groups’ evaluation of different forms of internal adjustment also reflected the material interests of their members. Compared to employer associations, trade unions and social policy groups were more supportive of measures to increase lower wages and social spending, whereas they opposed tax cuts, especially for private companies. Support for such tax cuts was significantly higher among employer associations.
Material interests also underpin support for financing policies. The more groups relied on exports to other members of the Eurozone, the more positively they evaluated various options for providing deficit countries with financial resources. Trade-reliant interest groups were particularly supportive of relief for debt owed to the German state. Trade unions, social policy groups, and professional associations tended to evaluate some forms of financing more positively than industry groups. While some of this could reflect material considerations—for example, trade unions’ support for the monetary expansion of the ECB could be interpreted as prioritizing employment over price stability—norms of international solidarity were also likely to play a role, underscoring arguments that both material interests and ideas played a role in the Eurozone crisis.
Finally, counter to our intuition, we do not find that trade-reliant groups are more opposed to Eurozone-breakup scenarios than groups that focus mostly on the domestic economy. As we have seen above, this is likely to stem from the fact that all groups, independent of their market orientation, were deeply concerned about the material repercussions of external adjustment.
Our argument also suggests that policies that lead to rebalancing through internal or external macroeconomic adjustment are likely to be more salient than financing policies, because the distributional effects of most forms of financing are more opaque and too long-term for interest groups to strongly care about them.
Fig. 3a confirms this argument. It shows the average share of policies that interest groups were indifferent about for each crisis strategy. Whereas only 16% of interest groups were indifferent about the external adjustment and 26% about the internal adjustment policies included in the survey, over a third (36%) showed themselves as indifferent towards financing measures. To assess policy salience more directly, we also asked respondents how important each policy was for their organization’s political work. Fig. 3b shows a stark contrast in salience between internal adjustment and financing.Footnote 18 Almost 80% of the groups stated that policies related to internal adjustment were important or rather important for their political work. In contrast, only 19% said the same for financing policies.
Qualitative evidence confirms this picture. While most interviewees supported financial rescue measures, the specificities of the bailout regime or the further steps to institutionalize transfers ranked very low on their political agenda (Interviews DE1; DE2). Even within large and encompassing employer associations—such as the Federation of German Industries (BDI) - there was no formal consultation about the specificities of financing policies. As a representative of a large umbrella association for business groups put it: “The potential costs of these measures were never really thought of or discussed. [...] There are simply 50 other topics that are of much greater importance to our members (Interview DE1).” Similarly, none of the policymakers we talked to could remembered major consultations with interest groups about financing measures (Interviews DE9; DE10; DE11; DE12). Finally, this finding is also in line with the results from Kudrna et al. (2018), who show that economic-interest groups had little influence on Germany’s positions in European negotiations over bailouts and other financing measures.
Trade-offs and difficult choices between external adjustment, internal adjustment, and financing
Until now, we have studied interest groups’ evaluations and the salience of different forms of internal adjustment, external adjustment, and financing separately. However, crisis politics needs to be understood as choices among trade-offs. As we have argued above, the preferences and political strategies of different economic groups in the crisis are likely to be driven by how they weigh the costs and benefits different strategies against each other. This is especially important in a setting in which groups strongly disagree about the desirability of different policy options within each strategy. As this makes it difficult to implement forms of domestic expansion or financing suiting everybody’s interests, understanding what drives decisions between costly alternatives is crucial.
To explore policy choices constrained by the trade-offs inherent in crisis management, we therefore asked interest groups in a second step to choose between different crisis response packages that embodied these trade-offs. For this purpose, we constructed two different choice sets in which respondents had to choose between three policy packages that correspond to internal adjustment (internal adjustment policies, limited financing, and no external adjustment), external adjustment (no internal adjustment, no financing, and external adjustment, i.e., a breakup of the Eurozone), and financing (no internal adjustment, extensive financing, and no external adjustment). The packages were customized for each interest group individually. For this purpose, we asked respondents in the first part of the survey to not only rate but also rank the different policies within each crisis strategy from their most to their least-preferred option. We then used these rankings to build customized policy packages. A first choice-set included only those policies in the respective strategy that each interest group had evaluated most favorably. The scenario thus illustrates the kind of strategies groups prefer when the adjustment trade-offs are relatively mild. The second set, however, confronted respondents with a much more difficult choice; it included only bad options—that is those policies that interest groups opposed most strongly. Figure 4 shows how the different packages were presented to respondents. Respondents’ choices of their preferred package in each of the two scenarios are used to generate two categorical variables: one that records interest groups’ preferred crisis strategy in a less constrained and one that records their choice in a highly constrained context.
Fig. 5a shows the distribution of choices in each of the two scenarios. On the left-hand side we see interest groups’ preferred crisis strategies when the policy packages include those policies they prefer most. Under these circumstances, we find that an overwhelming majority of groups would favor internal adjustment. 67% of interest groups in our sample support internal adjustment tailored towards their preferences, whereas less than 20% chose financing and less than 10% a breakup of the monetary union, even if these strategies equally contain their most preferred financing and external adjustment policies.
This picture changes dramatically in the highly constrained scenario, where interest groups are confronted with difficult trade-offs (Fig. 5b). When interest groups have to choose between crisis strategies that contain their least-preferred policies, only 30% of respondents remain supportive of internal adjustment. At the same time, even fewer groups select a breakup of the Eurozone (typically a German exit from EMU), and financing becomes significantly more attractive. When the trade-offs are difficult, interest groups also find it much harder to voice clear preferences, as the high number of “Don’t know” shows. Taken together, these changing patterns of support suggest that interest groups are finely attuned to the distributive consequences of different possible crisis policies. They are not fundamentally opposed to internal rebalancing of the economy, but show little enthusiasm for it if internal adjustment contains policies that they oppose.
We next explore how interest groups’ policy-specific preferences shape their crisis strategy choices in difficult trade-off situations. Interest groups are likely to form their crisis preferences based on the relative net costs or benefits of internal and external adjustment and financing, respectively. As long as groups benefit from the specific internal adjustment policy under consideration, we expect them to support domestic rebalancing. Financing, on the other hand, should become attractive when interest groups are confronted with trade-offs between forms of internal and external adjustment to which they are particularly opposed.
To examine this argument, we focus on choices between internal adjustment, financing and don’t know in the constrained trade-offs scenario, in which groups have to choose between crisis strategies that contain their least-preferred policies. As not even 4% of our respondents chose a Eurozone breakup in the least-preferred scenario, we do not model choices for external adjustment. We recode our dependent variables into dummy variables that take the value of one if a group chose an option and zero if it did not. As our analysis has shown that interest groups’ policy evaluations are related to their material interests, we assume that groups would benefit from policies they support and are vulnerable to policies they oppose. This allows us to proxy interest groups’ policy-specific vulnerabilities with their ratings of their least-preferred policies. To make sure that our findings are not driven by a group’s general position towards internal and external adjustment, we control for their average evaluations of all remaining policy options within each crisis strategy (i.e., all policies except the most disliked one(s)). We additionally control for the type of interest group as well as the organization’s general opinion about European integrationFootnote 19 and their overall attitude towards the role of the state in the economy.Footnote 20
Table 2 presents the results of probit regression analyses of the choice of internal adjustment (models 1), financing (models 2) and don’t know (model 3) when faced with difficult trade-offs. The results show that interest groups’ support or opposition to specific policies are, indeed, related to their choice of crisis strategies. The more opposed groups are towards the specific internal adjustment policies in question, the less likely they are to support domestic expansion. In contrast, the rating of the least-liked external adjustment strategy (usually German exit from the Eurozone), offered as an alternative, does not have any effect on this choice. This is likely related to the fact that an overwhelming majority of interest groups oppose such a policy. Finally, interest groups’ evaluations of the other internal adjustment policies do not have an effect. While this is perhaps not surprising given that these policies are not on offer, it suggests that the choice of internal adjustment is not driven by a general support for internal rebalancing. Interestingly, neither interest groups’ evaluation of European integration nor of state interventions make interest groups more likely to support internal adjustment.
Turning to financing (model 2), we expect that this should be an attractive alternative for groups who are opposed to both external and internal adjustment. Indeed, we find that the more opposed an interest group is to the specific internal adjustment policies at offer, the more likely it is to choose financing as its preferred crisis strategy, but the rating of the least-liked external adjustment policy once more has no effect. We also do not find a significant effect of interest groups’ rating of those internal and external adjustment policies not included in the policy packages. However, a general support for European integration is positively correlated with the likelihood of choosing financing. All findings remain unchanged when running multinomial logistic instead of probit regressions (see Table A3.1 on p.5 in the appendix).
To facilitate the interpretation of these results, Fig. 6 plots the predicted probabilities of choosing internal adjustment and financing across different levels of opposition towards interest groups’ respective least liked internal adjustment policies.Footnote 21 Groups that are generally supportive even of their least-liked internal adjustment policies have a predicted probability of about 75% of selecting internal adjustment but only of 7% for choosing financing as preferred crisis strategy. Results are turned upside down for groups who strongly oppose the internal adjustment policies under consideration. For these groups, the predicted probability of selecting internal adjustment lies only at about 10% whereas the likelihood of supporting financing rises to more than 45%. The probability for a group to prefer financing over other crisis responses is thus larger the more opposed it is to the specific form of internal adjustment under consideration.
In sum, our analysis of the interest-group data shows that a majority of groups prefers internal adjustment over other possible crisis responses, but only as long as this domestic expansion is achieved through policies that serve their interests. The costs and benefits – and hence the evaluations – of different internal adjustment policies, however, differ across groups. When trade-offs become difficult, the picture is far less clear and opposition to specific internal adjustment policies is then also associated with more support for financing, even in its unpopular variants. Moreover, a large majority of groups is strongly opposed to external adjustment.