How the Bundesbank enforced German austerity since the 1970s

In my article “One State, One Interest?”, I develop a novel explanation for Germany’s early and enduring turn to fiscal austerity in the 1970s. The article challenges existing accounts that attribute the rise of German austerity to globalization or ideational developments and instead emphasizes conflicts within the state—specifically, between the Bundesbank and successive Social Democratic governments in the 1970s.

Using an original process-tracing research design and archival evidence from the Bundesbank and the Federal Cabinet, the article demonstrates that the breakdown of the Bretton Woods system marked a critical juncture that redistributed institutional power toward the central bank.

Under Bretton Woods, the Bundesbank had to maintain the DM's fixed exchange rate against the dollar, which required it to purchase dollars to defend the parity, generating additional domestic liquidity, particularly after the expansion of US monetary policy in the late 1960s and early 1970s. When the Bretton Woods order began to crumble in the early 1970s, the Bundesbank debated both dirigiste credit controls and more market-based approaches and decided in favour of the latter. This was the case because some officials feared that direct controls would give the government more influence over credit allocation and weaken the bank's institutional power. When the dollar-DM parity was abandoned, monetary officials realized that they had gained greater autonomy over monetary policy and used this new autonomy to strategically intervene in fiscal governance, exploiting the government's dependence on lower interest rates to pressure it to adopt fiscal reforms.

The article introduces the concept of microstrategies to describe how central banks can expand their authority through targeted actions during moments of international institutional change. Two such strategies—overreach through the deployment of new monetary instruments, and bargaining through interest rate leverage—allowed the Bundesbank to discipline fiscal policy and push for the adoption of binding fiscal rules.