Social Market Economy

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1 Social Market Economy

2 With the kind financial support of: and Dr.-Ing. Mariana Mureșan (b. Popa) (þ) 2014 Springer Science + Business Media

3 Ştefan Sorin Mureşan Social Market Economy The Case of Germany

4 Ştefan Sorin Mureşan Bonn, Germany ISBN ISBN (ebook) DOI / Springer Cham Heidelberg New York Dordrecht London Library of Congress Control Number: Springer International Publishing Switzerland 2014 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. Exempted from this legal reservation are brief excerpts in connection with reviews or scholarly analysis or material supplied specifically for the purpose of being entered and executed on a computer system, for exclusive use by the purchaser of the work. Duplication of this publication or parts thereof is permitted only under the provisions of the Copyright Law of the Publisher s location, in its current version, and permission for use must always be obtained from Springer. Permissions for use may be obtained through RightsLink at the Copyright Clearance Center. Violations are liable to prosecution under the respective Copyright Law. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. While the advice and information in this book are believed to be true and accurate at the date of publication, neither the authors nor the editors nor the publisher can accept any legal responsibility for any errors or omissions that may be made. The publisher makes no warranty, express or implied, with respect to the material contained herein. Printed on acid-free paper Springer is part of Springer Science+Business Media (

5 Foreword With the English version of Economia Socială de Piaţă. Modelul German, Sorin Mureşan is presenting a remarkable book. He analyses the German model of economic policy, which was responsible for a long upswing and recovery of Germany after Second World War. Thus, he discusses the Social Market Economy from an external perspective. The author is doing this in a systematic way: beginning with a presentation of the German model in its theoretic features and then comparing it with other theoretic models. This theoretical part is followed by a longer debate of the philosophical foundations of the Social Market Economy model, before the German reality after 1945 is discussed. Lessons from the German model conclude the book. The fact that the German model of economic policy is analysed carefully from abroad is welcome for several reasons. First, it can not least because of its success especially directly after the economic and monetary reform in 1948 still serve as an example for transformation economies these days. Insofar, the book might become very important for the Romanian economic policy, given that the political will for a sustainable reform policy continues to be strong in the future. Not all actions taken by Ludwig Erhard with respect to the reform in 1948 received political approval, but so did the package. In other words, the importance of the model lies as Mureşan has shown in the consideration of the complexity of economic activity and the interdependency of single elements of the economic order. For this reason, the formulated concept is unique. Second, the time after 1948 until today has shown the danger inherited in such an order: with numerous single interventions that were all well meant and relatively harmless, the economic order can permanently be undermined and the incentive scheme be perverted. In particular the economic and financial crisis inside and outside the Euro area shows how badly designed policy and poorly regulated markets can slowly endanger a whole continent. Having shown this is especially commendable, since it gives economic policy the opportunity to create safeguards against an incremental corruption of an economic order by incorporating the German lessons. Third and this is important, too the German economic science as well as the permanent reform debate could gain momentum because of a critical analysis presented by foreign experts. v

6 vi Foreword Although it is naive to believe the lecture of this study would guide the federal government back to a first best policy, at least there is hope that an additional voice that is unsuspicious of partisanship strengthens the arguments for a regulative recall. It is to be hoped that the book is reaching a large international audience and thereby is a contribution to the policy reform debate in Europe. It would also be desirable that the author is using the acquired expertise to join the debate in Germany, too. Jena September 2012 Andreas Freytag

7 Acknowledgements This book attempts to present first of all the roots and structure of the theoretical model of Social Market Economy. Then it looks at principles used in issuing national legislation and institution building, before presenting the stages undergone by the Social Market Economy since its creation in 1948 in Germany and until Finally, the international context is analysed in which advantages can be drawn from implementing this economic system both by Germany and by a selected number of emerging markets in Eastern Europe, Asia, Africa and South America. There are several friends, colleagues, superiors and institutions I would like to thank for supporting me with this interdisciplinary book. It is actually difficult to say who deserves more and whom to acknowledge here, given the limited space available, since I do not wish to leave out in the English version those who helped me with writing the first version of the book in Romanian in My first thanks go to my mother Mariana who motivated me and helped with financial resources for the first translation into English of the original version in Romanian of Then, my thanks go to my wife Ines who brought understanding for my investment of a very large amount of time and resources into completing the English version of this book. I thank Prof. Andreas Freytag of the University of Jena for offering me in the year 2000 while I was a diplomat the opportunity for the initial research at the Institut für Wirtschaftspolitik der Universität Köln and for keeping in touch over a geographical distance which came about when he moved from Cologne to Jena and I was commuting between Bucureşti, Bonn and Brussels. I thank Prof. Gheorghe Popescu for suggesting the topic in the late 1990s as a worthwhile research topic for my PhD as well as for structuring my work into feasible stages. I also thank my friend Dr. Caspar Jürgens for a lot of motivation for continuing to work academically during the years when I moved from diplomatic and political to commercial work. For my scientific formation and overall insights into theology, philosophy, history, economics, politics, foreign policy, diplomacy and international economics, I thank Dr. Ioan Vasile Botiza, Fr. Ken Collins, Fr. Louis McRaye, Dr. Robert Taylor, Dr. Roger McGeehan, Ambassador Sergiu Celac, Dr. Nabil Ayad, Festus Luboyera and Academician Solomon Marcus. vii

8 viii Acknowledgements For insights into the German economic and political system as well as into foreign policy and international economic relations, I thank Prof. Karl-Heinz Hornhues, Klaus Francke, Dr. Friedrich Wünsche, Prof. Gerhard Fels, Dr. Rolf Kroker, Wendula Gräfin von Klinckowstroem, Prof. Viktor Vanberg and Prof. Juergen Donges. To Becky Landis thanks are due for having helped me with the native speaker check during long hours of work. I would have liked to include many more relevant pictures, charts and maps, but I had to stop at those already included here. The reason is the large amount of administrative and correspondence work I would have had to deliver in order to receive permission to use them. Nevertheless, several institutions kindly gave permissions in connection with reprints here. For this I would like to thank the Institut der Deutschen Wirtschaft Köln, Cambridge University Press (Prof. Goodin, Prof. Muffels, Prof. Headey and Dr. Dirven), Stadtarchiv Jena, Jena University, the OECD and the German Bundesanstalt für Immobilienaufgaben. To the Bibliothek des Deutschen Bundestages, the Bundeszentrale für politische Bildung and the Hauptbibliothek der Universität Bonn in whose premises I carried out almost all of my research and writing, thanks are also due. Now I invite you to read some of the ideas I believe to be helpful for a mutually respectful coexistence in our common ancient Greek and Roman, Judeo Christian, European, Mediterranean and Atlantic space. Bucharest June 2014 Sorin Mureşan

9 Argumentum Why Social Market Economy? First of all, the economic and financial crisis which rocked in to the bottom the foundations of the Western free markets based economic systems we have in place since Bretton Woods, showed that globalisation brought in the meanwhile results and neoliberalism had reached its limits. In other words the doctrine of the sky is the limit reached its own limit. Some call this economic and financial crisis the first crisis of globalization. 1 It forces us to rethink the whole system in a holistic manner. This system of neoliberal style market economy exported worldwide under the US UK leadership succeeded indeed to prove successful in bringing the highest level of wealth and to as many people history has ever seen. It was more or less done within two generations starting in Moreover, the system of Western neoliberal capitalism succeeded in 1991, after the reform of Bretton Woods by the introduction of free floating system on the foreign exchange market in to win the Cold War and defeat the centralised planned economic 2 systems of the socialist camp. Thus, as there are so many aspects involved, we need to analyse the current status quo in economics, social aspects and finance. We need to look at what we have now, where we are coming from and where we should be going to from here. In this process of self-reflection, we would have to look comparatively at various economic, social, financial and monetary systems. One of them is the Social Market Economy. Such a system has not been a mainstream system, but one standing since 1948 in the shadow of neoliberalism. By analysing it as a monographic study, from roots (theory and principles) to fruits (practical wealth), we might get insights which in their turn will be valuable for 1 Compare Brown (2010), whose book title is very suggestive. 2 The Western comparatively higher productivity did not come at zero cost. The systemic increase of Western public debt, private debt and other hidden costs, such as a low demography, immigration of political and economic refugees, etc., was part of the price to pay for winning the Cold War much earlier than originally expected. ix

10 x Argumentum creatively reforming the current systems in place now by applying as little effort as possible. Social Market Economy is an example of a social and economic system whose analysis broadens knowledge and, in certain ways, offers a bigger picture on the many connections between the political and economic fields, both nationally and internationally, i.e. what we call the interdependence of orders, or layers. The statement holds true especially for a time such as this, when many countries are searching for social and economic models to suit their national interest. The Social Market Economy integrates economic performance, public security, social equity and dialogue between social partners. The Social Market Economy recreates and solves the economic role of the government as well as the distribution of public and private power in a free economy. The Social Market Economy delves into the cultural identity and history of European societies before Christ, to ancient Greek and Roman thought. It is built mostly on Western medieval Christian doctrine, including models of Church teaching and how it was applied in the German speaking area of Europe. It also integrates the advent of political democracy with the help of the French Revolution and Napoleon Bonaparte. Since 1948, the Social Market Economy has had a fundamentally liberal philosophy. Second, the success of neoliberalism applied between 1973 and 2008 has become possible because of the combined military power of the USA and UK. This military power enabled these countries to secure public and predictable international order. This made in its turn possible the taking up of debt (public, commercial and private). The doctrine of growth by spending in deficit was applied starting with the USA that was then followed by the rest of Western economies. All of the Western countries and many of their citizens took up debt and have now reached the highest level of public, personal individual and company debt as the world has ever seen. Debt taken up via the possibilities opened by financial and monetary deregulation has in the meanwhile become unbearably large, thus endangering the long-term stability of financial markets and thus that of the real economy and related trade activities. From this perspective, the whole Western economic system has to be reviewed quickly before it is too late. Total levels of debt can be estimated at over 500 % of GDP in the UK, ca. 300 % of GDP in the USA, over 300 % in Japan, over 250 % in Spain and over 290 % of GDP 3 in Germany, and are no longer sustainable. This is all the more true if we compare it with the thousands of billions of dollars of surplus that China, India and some other emerging market countries have been hoarding since the early 1980s. The effects of debt and international imbalances in economic weight seem to be increasingly endangering 3 See The Economist (2011, July 9). The figures are not easy to calculate not even by the economist because all debt should be calculated by taking into consideration not only the lending contracts due at the moment of calculation of the outstanding debt but also the contracts already entered into by the sovereign, which are due only in 20 or 30 years. The latter can be pension contracts of civil servants entered into at the moment of calculation, which will be due only in 20 or 30 years time when the respective civil servants will retire.

11 Argumentum xi the international monetary system. This might lead in its turn at some point to unrest or civil war. Something has to change here soon, very soon. For this we need to again address similar systems, which are/have/pursue a more ethical approach. Third, a rethinking of the system is due for ethical and health reasons as well. In order to achieve higher productivity levels than the rest of the world, the West had to make its own sacrifices. Here I talk of human and family sacrifice by the workforce in the form of erosion of family and ethical values and burnout syndrome affecting the health of the workforce, thus indirectly increasing the cost of health. In its turn the cost of health diminishes productivity. To correct this, again, we need to look at a market economy system which is more social or more human in its approach or style. This is a common ideal not only for the social democrats in Europe but also for the conservative and Christian-Democratic political forces as well. Thus, for example, at the Statutory Congress of the European People s Party in December 2009 in Bonn, Germany, a political document has been adopted which basically states that as far as economic policy is concerned, we must return to the founding fathers of the Social Market Economy. The axiom of as much market and private initiative as possible, as much state as necessary is today more valid than ever before. In this sense, the role of the state versus the role of private actors, especially in the financial world, must be carefully reassessed, considering the public demand for more economic efficiency, social coherence and solidarity. 4 It is this reassessment which this book tries to make. Fourth, if we look at social market economic systems, we have to look at them on the European continent, in its Western half. Although various forms of more or less interconnected Social Market Economy systems and related styles of economic policy have been put in place more or less spontaneously over historical periods in the Netherlands, Belgium, France, Switzerland, Austria and Italy, and even the Scandinavian lands, the Social Market Economy in Germany has been implemented as a new creation, replacing the totalitarian centralised economic system driving Germany between 1933 and Therefore, if we want a new system, we should look at it in that country where it has been created anew. By looking at how the Social Market Economy has been developed and implemented in Germany, we can better see how a new system can manage to successfully replace an old one. Social Market Economy is the economic and social system that made the miracle of economic and political rebirth of Germany possible after its crushing defeat in the Second World War and social confusion by the excesses of the national-socialist dictatorship. Fifth, since the European Union and the euro area, as the largest market worldwide has the German model at its core, we should look at the Social Market Economy in Germany. The German economy is the first in Europe both with regard to size and resilience. It will have considerable influence on the evolution of the economies of the EU and the international economic policies of the latter. 4 See European Popular Party (2009), p. 8.

12 xii Argumentum Sixth, taken on its own, Germany is the fourth largest economy in the world in the classification according to its contribution to the total world GDP. Also, Germany is the second largest exporter of merchandise worldwide. Both facts are reasons in favour of the decision to look at the system developed in Germany. References Brown G (2010) Beyond the crash: overcoming the first crisis of globalization. Simon& Schuster, London European Popular Party (2009) The social market economy in a globalized world. In: Congress document adopted by the EPP Statutory Congress Bonn, 9 10 Dec Internet portal www. Accessed 19 Dec 2010 The Economist (2011, July 9) Debt reduction. Handle with care. Deleveraging will dominate the rich world s economies for years. Done badly, it could wreck them. Leaders section (with July 7 date in online edition). Print edition, London

13 Contents 1 Introduction Methodology References Philosophical and Historical Roots for the Social Market Economy The European and German Historical and Philosophical Context Christian and Secular Philosophy Scholasticism and Catholic Social Teaching Evangelical Protestant Social Ethics Jewish Contributions Secularisation, Nation and Economy Liberalism in Germany The Socio-Economists, Forefathers of the Social Market Economy The Political and Economic Context of Germany Between 1918 and The Freiburg Circles. Other Groups of Dissident Intellectuals Individual Contributions of the Forefathers Ordoliberalism References Models of Capitalism Anglo-Saxon and Rhineland Capitalism Operating Styles of Capitalist Economic Systems Liberal Style Social-Democratic Style Corporatist Style xiii

14 xiv Contents 3.3 Practical Models of Capitalist Market Economies The US American Model The Dutch Model The Swedish Model The Italian Model The German Model References Pillars of the Social Market Economy as Implemented in Germany Market Economy and Its Institutions Political Freedom, Private Property, Monetary Reform Business Organisations (Companies), Profit and Investments Competition Monetary Stability and Predictability of Economic Policy Wages, Trade Unions and Company Management Social Order and Its Institutions General Principles Principles for Taxation and Social Income Redistribution Social Security in Practice Environmental Protection, Sustainability and Institutions References Building Up and Implementing a Social Market Economy in Germany Rebuilding a Market Economy and an Industrial Base ( ) Strategic Decisions ( ) Start Off: First Measures and Successes ( ) Building Institutions and Legislation: Continuing Success ( ) Consolidation of Success and First Difficulties ( ) Macroeconomic Dirigisme ( ) First Years of Macroeconomic Dirigisme ( ) Chronicisation of Unemployment, But Growth Is Uninterrupted ( ) Return to Ordoliberalism, But Via More Public Debt ( ) Economic and Financial Policy Social Security Policy Environmental Policy and Roots of Sustainability German Reunification as Expansion of Territories for Application of the Social Market Economy

15 Contents xv 5.4 Towards A New Social-Democratic Synthesis and Renewal of the Social Market Economy in the Post-1998 and Post-9/11 Era Domestic Economic and Political Aspects European Unification and Enlargement References What Is on the Horizon for the Social Market Economy? Theories and Doctrines: Neoliberalism, Socialism, Ethical Values Immigration, Multiculturalism, Europeanisation, Globalisation: Germanisation or De-Germanisation? Market Economy and Social Order: Keeping a Balance Production of Goods and Services: International Position Due to the Social Market Economy Social Security: Investing in Human Capital, the Environment and Sustainability Any Applicability of Aspects of the Social Market Economy Outside Its Genesis Space? North-East and South-East Europe: Estonia, Romania Outside Europe: China, Brazil, South Africa Case of a Western Monetary Reset or Reform References Principles and Economic Style Moulded Into Sustainability and Foreign Policy Interests Can Elements of the Social Market Economy Model Be Useful for a New Global Economic and Financial System After an Eventual Western Monetary Reset? References Appendix A: Presidents and Chancellors of Germany After Appendix B: Federal Ministers of the Economy After Appendix C: Selection of Important Legislative Acts: Appendix D: Components and Monthly Spending of a Standard Salary Appendix E: National Income, GNP, GDP of Germany, , EUR Billion Appendix F: Population, Million, Appendix G: Company Mergers and Acquisitions Around the Globe, Number, Appendix H: Volume of Worldwide Company Mergers and Acquisitions, USD Billion,

16 xvi Contents Appendix I: The Sixteen Länder and Respective Capitals, Appendix J: The Main Regional Economic Blocks, Appendix K: Photos

17 List of Abbreviations AD Anno Domini a.s.o and so on BDI Bundesverband der Deutschen Industrie (Federal Association of German Industry) BGB Bürgerliches Gesetzbuch (German Civil Code) BOD Board of Directors CDU Christlich Demokratische Union Deutschlands (Christian Democrat Union) CIS Commonwealth of Independent States Comp. Compare CSU Christlich-Soziale Union (Christian Social Union) DGB Deutscher Gewerkschaftsbund (German Trade Unions Association) DM Deutsche Mark DRG German Democratic Republic EC The European Community ECB European Central Bank EFTA European Free Trade Association ERP European Recovery Programme ESCB The European System of Central Banks EU European Union FDP Freie Demokratische Partei (Free Democratic Party) Fr. In French FRG Federal Republic of Germany (mostly meant as West Germany, ) G7/8 G20 Group of 7/8 respectively group of 20 GDP Gross domestic product Germ. In German GNP Gross national product HGB Handelsgesetzbuch (German Commercial Code) xvii

18 xviii List of Abbreviations IGMetall Industrie Gewerkschaft Metall (Industrial Metal Trade Union) Ital. In Italian N.B. Nota bene NATO North Atlantic Treaty Organization NGO Non-governmental organization NPD National Demokratische Partei Deutschlands NSDAP Nationalsozialistische Deutsche Arbeiterpartei (National Socialist German Workers Party) o.n. Our note OECD Organization for Economic Co-operation and Development ÖTV Öffentlicher Dienst, Transport und Verkehr Gewerkschaft (German Public, Transport and Traffic Trade Union) S. Theol. Summa Theologiae by Thomas Aquinas SGB Sozialgesetzbuch (German Social Code) SGM Shareholders general meeting SME Social Market Economy SPD Sozialdemokratische Partei Deutschlands (Social Democratic Party of Germany) TTIP Transatlantic Trade and Investment Partnership UN United Nations UNESCO United Nations Educational, Scientific and Cultural Organization USSR The Union of Soviet Socialist Republics VAT Value-added tax WCL Works council WTO World Trade Organization ZDR Zentralverband des Deutsche Handwerks (Central Association of German Craftsmen)

19 List of Illustrations Illustration 2.1 The Freiburg and Cologne schools of thought and Ludwig Erhard: main ideas Illustration 4.1 The villa of the Social Market Economy in a sketch of the economic and social system as applied after 1945 in Germany Illustration 5.1 Stages of the social market economy as applied after 1945 in Germany xix

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21 List of Charts Chart 3.1 Percentage of beneficiaries of social assistance in countries, over no. of years. Source: Goodin et al. (1999), Fig. 9.3, p Reproduced with kind permission of Cambridge University Press and the authors Chart 3.2 Open unemployment rate in Sweden, , approximate data. Chart years Source: Statistics Sweden, Labor Force Surveys and National Accounts Statistics, Forslund (1997) p. 147, Fig. 5 then extended with own calculations on OECD data Chart 4.1 Total number of companies in Germany, classified according to legal form, Chart 4.2 Percent of companies per employee numbers, processing industry, Chart 4.3 Percent of companies, per size according to employee in processing industry, Chart 4.4 Turnover share of companies per employee numbers, Chart 4.5 in industry, Turnover share of companies, per size according to employee in industry, Chart 4.6 Changes of inflation rate in Germany, Chart 4.7 GDP per capita in all German Länder in Chart 4.8 Trade union members, Chart 4.9 Trade union members, Chart 4.10 Air pollution volumes, , thsds. tons Chart 5.1 Statutory health insurance expenditure, % of total, 2010 and Chart 5.2 Unemployment, %, Chart 5.3 Total national income of united Germany, EUR, xxi

22 xxii List of Charts Chart 5.4 Evolution of GDP, %, Chart 5.5 Public debt in Germany, EUR, Chart 6.1 The state s share, % of GDP, Chart 6.2 Globalisation of trade with goods, % of global trade, Chart 6.3 Globalisation of trade with goods, % of global trade, Chart 6.4 Globalisation of trade with services, % of global trade, Chart 6.5 Globalisation of trade with services, % of global trade, Chart 6.6 The share of the state in the selected countries of the developed world, % of GDP, 2001 and

23 List of Tables Table 3.1 Table 4.1 Table 4.2 Table 5.1 Public social security expenditure in selected countries, % of GDP, Degree of wage contract binding of companies and employees, 2000 and (>) 2009, % of total number of companies at national level resp. of employees Germany s social security expenditure, 2000 (provisional) and 2009 (estimated) Sources of German tax revenue, EUR,2001 and 2010 (estimation Nov. 2010) xxiii

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25 About the Author Ştefan Sorin Mureşan was born in Cluj-Napoca in 1965 into a Romanian Transylvanian family with roots in the Barițiu family of the founders of the modern national Romanian state which began with the 1848 revolution. He graduated from the German school in Romania and first got a mechanical engineering degree from the Polytechnic University of Cluj-Napoca in Before getting his MA in diplomatic studies from the University of Westminster in London in 1994, he had studied after 1991 philosophy, theology, international relations, European history, international trade and finance and international business law at Oscott College in Birmingham, England (Catholic University of Leuven) and at the US International University Europe during the time it had its campus in Oxford, England. He studied the political system of the Federal Republic of Germany at the Faculty of Political Science at the University of Bonn in After 1999 he studied economics in the Ph.D. programme of the Faculty of Economic Science at Babeş-Bolyai University in Cluj-Napoca which awarded him a Ph.D. in economics in Dr. Muresan s affiliation currently is with the Altiero Spinelli Centre for the Study of European Organisation at the Babeş-Bolyai University of Cluj-Napoca. His postgraduate work specialisations were at the Research Center of the US Library of Congress in Washington, D.C. in 1996 and at the Foreign Affairs Committee of the German Federal Parliament in Bonn from 1996 to The author has been awarded the Eudoxiu Hurmuzaki scientific prize for history of the Romanian Academy of Science in Since 2014 he is also a member of the Romanian Association for the Club of Rome. xxv

26 xxvi About the Author Mureşan s work experience is in Romania and in Germany: as a diplomat (First Secretary) in the Department for Economic Diplomacy of the Ministry of Foreign Affairs in București and in the Romanian Embassy in Germany. He also worked as a parliamentary expert for international parliamentary relations for the President of the Parliament of Romania in Bucureşti. In privatisation and M&A, he worked for the State Ownership Fund (Romanian privatisation agency) and acquired practical business experience with the Terapia SA pharmaceutical plant in Cluj-Napoca. The author taught as an associate professor Global Economic and Financial System at Babes-Bolyai University in and was affiliated there with the Institute of International Studies. While in Germany he works as a business consultant specializing in East West business development for industry and trade, in international project management and as a political consultant. As of 2012 he teaches economic diplomacy for incoming international undergraduate students at the University of Applied Science in Würzburg. Mureşan also works occasionally on international relations and EU project funding for the German National Agency at the Federal Institute for Vocational Education and Training. The main research for this volume has been done in Bonn, Germany, between when the author was a business consultant, a diplomat at the Romanian Embassy in Bonn, and exchange parliamentary staff at the Bundestag s Foreign Affairs Committee.