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Making Sense of Germany's Role in the Euro Zone: The Outlier Hypothesis

David Schäfer

The creation of the EU banking union as the latest of the EU's grand bargains met with considerable reservations from the German government. Even though the existing literature recognises the centrality of Germany and its preferences in the negotiations, it lacks an analysis of the sources of the government's preferences. This paper aims to fill this gap in the literature and explain the preferences of the German government towards the four most contentious issues of the banking union negotiations (scope, bail-in, joint resolution fund, and decision-making procedures). The theoretical framework is eclectic and sheds light on four dimensions: (1) material interests, (2) ideas and policy paradigms, (3) the role of institutions and (4) the domestic politics behind Germany's preferences. The paper argues that all four dimensions offer valuable insights into the preference formation of the German government. The particular structure of its banking system characterised by small public banks providing for half or the banks in the EU, the particular German ordoliberal policy paradigm, the embeddedness of these ideas in the Finance Ministry as lead negotiator and the active role of the Constitutional Court significantly constrained the government in the preference formation. The paper highlights that these four sources are fairly distinct compared to other EU member states. Besides explaining Germany's preferences, it therefore also accounts for why Germany was isolated on most negotiation issues. Conceptualising the most powerful member state as some kind of 'outlier' in the negotiations also explains the high level of conflict in the negotiations.

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