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On the basis of the NATREX model, several key studies are evaluated to answer the questions: How can the trends in the real exchange rates of the transition economies of Eastern Europe be explained? What are sustainable and equilibrium real exchange rates, current account deficits, and net investment positions in the medium and in the long-run? What are the policy implications for the transition economies planning to join the Euro area? Neither the PPP nor the Balassa-Samuelson hypotheses can explain the data. Both the reduced form and structural equations of the NATREX model are consistent with the data for Hungary and the Czech Republic. The exchange rate behavior for Poland and Bulgaria also are explained by the NATREX model.

EMU is situated in the context of the legacies of Schiller (especially coronation theory) and of Schmidt (the creation of the EMS). Schmidt's leadership style is examined with reference to the Bundesbank, especially Emminger and the ordo‐liberals. The failure to launch the second stage of the EMS in 1982 is also considered.

Kohl's beliefs about EMU and governing style are examined, along with the policy ideas of Stoltenberg and the power of the Finance Ministry and of the Bundesbank over EMU. Particular attention is paid to attempts to fend off challenges to develop the EMS. Crucial to this account is the role of Genscher and then of Kohl in preparing the Hanover European Council and in sustaining the political initiative by binding in the Bundesbank through Pöhl's role in the Delors Committee. The role and impact of German unification was central to the reframing of EMU in 1989–90 and to Kohl's leadership role.

The influences on German negotiating positions are examined from the preparation for the IGC through to the end game. The focus is on Kohl, Waigel, Köhler, and Lautenschlager, as well as what happened inside the Bundesbank. A key question is why the German government accepted irreversibility at Maastricht. The Franco–German relationship emerges as central to the negotiations, along with Kohl's determination to save the treaty. German negotiators had to learn to trust the French, to move beyond coronation theory, and to pacify German public opinion by ensuring that the single currency was at least as stable as the D‐mark.

This chapter examines the core of the German financial system and analyses the performance of German banks by looking at the Deutsche Bundesbank, the German central bank whose prudence in managing monetary policy and financial deregulation has fostered financial innovation in West Germany. It explains that it is possible to distinguish between two large groups of banks – the first is the group of universal banks which make up three-quarters of the sector's total business and includes three types of firms: commercial banks, savings banks, and credit cooperatives; the second group consists of those banks that offer more specialized services: mortgage banks, specialized banks, and postal-banking services. The chapter shows the dominance of universal banks over specialized banks, from the point of view of credit investment and shareholder assets, and adds that the comparative number of branches also confirms this.

This chapter asks how German policymakers responded to the monetary turbulences that signaled the end of the golden age of capitalism from the mid-1960s onward. To address this question, the chapter challenges the popular view that Bretton Woods died at the hands of a declining US hegemon and zooms in on the actions of its allies: while French attempts to push the US toward monetary reform destroyed the dollar-gold standard as early as March 1968, German efforts to protect themselves from the abuse of dollar seignorage upended the regime of fixed exchange rates three years later. The chapter argues that, unlike elsewhere in the advanced industrialized world, the shift toward floating enabled the German state to double down on price stability and restabilize its embedded liberal compromise—an experience that framed how German policymakers would respond to the wider economic turmoil of the 1970s.

This chapter argues that in order to protect its export model from the dangers of imported inflation, Germany strove to commit the US to monetary and fiscal rigor. To this end, German officials blocked the attempts of the Carter administration to organize a global Keynesian expansion, and scaled back their foreign exchange interventions in support of a weakening dollar. Both actions helped push the US into the Volcker Shock, which deflated the world economy and launched the attack on organized labor. The chapter concludes that the neoliberal experiment in the US, paralleled and reinforced by similar attempts in the UK, was late and lucky. Rather than the outcome of a decade-long domestic shift—seamless and sealed off from the world outside the Anglo-American heartland—the neoliberal counter-revolution was driven in part by the external pressures imposed by Germany, and subsequently sustained by a bout of Japanese investment.

This chapter empirically investigates the tax and nontax motives of establishing conduit entities in third countries as well as the motives for establishing country holdings. It provides descriptive evidence for the increasing role of holding companies and ownership chains, making use of the Deutsche Bundesbank’s FDI data (MiDi), and presents some explorative regressions that show the significance of tax factors behind ownership chains. The analysis of the German data suggests that tax factors are indeed important for ownership chains in international investment.

This chapter analyzes the effect of company taxes on complex multinational financial decisions, using firms selected from the database of the Deutsche Bundesbank (MiDi). It shows that the debt-to-asset ratios of German outbound investment significantly depend on the host country tax rates. Intracompany loans react in a slight elastic way to tax rate changes, while third-party debt appears less flexible.

This chapter explains the monetary targeting framework followed by the German Bundesbank from 1974 to 1998, and relates the Bundesbank’s success in maintaining price stability and in anchoring inflation expectations to its strategy. The goal is to provide a historical account of the conduct of monetary policy, focusing especially on the first ten years of monetary targeting, from 1975 until the middle of the 1980s, when price stability was virtually reached in Germany.

The European Central Bank (ECB) was established with the Maastricht Treaty, which in 1992 laid down the institutional foundations of European Union monetary union. The architects of the euro essentially decided to model the ECB on the German Bundesbank, an acknowledgement of the operational and intellectual dominance of Germany’s model of monetary policy. Upon Germany’s insistence, the institution that emerged from the Maastricht negotiations was made into one of the most independent monetary institutions in the world. The Maastricht architecture was also equipped with a budgetary discipline pillar, again upon Germany’s insistence. However, as the Greek, Irish and Spanish crises made clear, the Stability Pact suffered from severe design flaws, and euro-area members made the transition to the euro without realizing what responsibilities participation in a monetary union entails.

The euro is at a crossroads. Not only has it been blamed for having contributed to the European crisis and for preventing a solution, but there is a growing conflict between many in Germany and the European Central Bank (ECB), the guardian of the euro and the common monetary policy. This division and isolated views in Germany are worrisome. Why do politicians, the media, and in particular, economists differ so fundamentally in their views on the euro and monetary policy? How is it possible that in this age, in which information is abundantly available and shared globally, nationality and the environment in which people operate play such a big role? What does it mean for the future of Europe?

This chapter examines Hans Tietmeyer’s long engagement with EMU as a conviction Ordo-liberal, from the late 1960s to the launch of monetary union in 1999. In particular, it explores his intellectual background and character; his efforts to adapt the design of EMU to Ordo-liberal principles; and the many controversies in which he was involved. The main focus is on a critical assessment of Tietmeyer’s contribution and his legacy to EMU and on the nature and role of Ordo-liberalism. How successful was he in identifying the foundations for a sustainable monetary union? The chapter is based on large-scale elite interview research.

As President of the Bundesbank Council, Karl-Otto Pöhl occupied a pivotal position in the negotiations leading to EMU, principally within the Delors Committee and within the Committee of EC Central Bank Governors. Based on original research, this chapter examines the factors conditioning Pöhl’s attitude to EMU, the paradox that accompanied his contribution to EMU, and his longer-term legacy. Pöhl was sceptical of the idea of monetary union, and many (including Margaret Thatcher) thought that he would block the proposal; but in fact, he agreed to sign the Delors Report. Later, he was instrumental in designing the ECB statute, and in particular the emphasis on the price stability mandate. At the same time, he offered public criticism of the project of monetary union. The chapter offers an insight into the role of the Bundesbank staff as well as of the President of the Bundesbank Council in the making of monetary union.