Germany’s position in Europe looks
increasingly peculiar and vulnerable. In the chaos of German unification
in 1990, when Germany’s neighbors were terrified of the new giant,
then-Chancellor Helmut Kohl promised a European Germany, not a German
Europe. Today, however, the terms of any European rescue effort are
obviously set by Germany.
There is widespread recognition that Europe needs substantial
economic growth if it is to emerge from its debt woes. But German
concerns about stability – founded on its catastrophic interwar
experience – push in the opposite direction. As a consequence,
Germany-bashing is now in fashion.
Germany’s critics make two points: the real European problem is the
German current-account surplus, and Germans are perversely obsessed with
their past.
The German current-account position is in fact a long-standing issue
that predates the monetary union. By the 1960’s, Germany had emerged as
the strongest and most dynamic European economy, owing to robust export
performance. German current-account surpluses, driven primarily by
positive trade balances, appeared briefly in the 1950’s, were corrected
after a currency revaluation in 1961, and then re-emerged in surges in
the late 1960’s, the late 1970’s, the late 1980’s, and again in the
2000’s.
If the resulting imbalances could not be financed and sustained,
there was a need for adjustment. At regular intervals since the 1960’s,
Germany’s European partners, notably France, faced the prospect of
austerity and deflation in order to correct deficits. This alternative
was unattractive to the French political elite, because it constrained
growth and guaranteed electoral unpopularity.
The French (and the other Mediterranean countries) preferred German
monetary and fiscal expansion, which would attenuate Germany’s strong
export orientation. But this course was always unpopular with Germans,
who, given the interwar legacy, worried about inflation and its
implications.
German policymakers thought that the issue would disappear with the
monetary union’s launch, on the grounds that no one in the United States
worries about a Californian boom that produces the equivalent of
current-account surpluses (if anyone bothered to measure them). Nobody
tells Californians to relax and go to the beach when times are good.
The second criticism, repeatedly voiced by the Nobel laureate
economist Paul Krugman, is that the supposed German history lesson is
chronologically false. It was not the famous hyperinflation of the early
1920’s that destroyed Germany’s fragile Weimar Republic and gave rise
to the Nazi dictatorship. Rather, democracy was killed a decade later by
depression and deflation.
This contemporary criticism misses an important element of the German
policy predicament of the early 1930’s. By the Great Depression,
Germany was already trapped, owing to previous bad choices. It is
precisely that lesson which is deeply engrained in German political
consciousness.
Germans are right to notice the parallels between conditions in
Europe today and those in the interwar period. The similarities consist
in the implications of the choice of currency regime for political
behavior and democratic legitimacy.
At the end of its hyperinflation, Germany locked itself into a
currency regime, the international gold standard, which was deliberately
designed to be so limiting that exit was impossible. The anticipated
consequence was that the country would appear credible and become
attractive to foreign capital.
As the strategy worked, capital inflows sparked both public-sector
and private-sector booms. Governments at all levels funded politically
attractive but expensive infrastructure projects.
But there was a downside. The boom’s vigor, coupled with prior
experience of inflation, led to wage increases that were not matched by
productivity gains. As a result, Weimar Germany lost competitiveness in
the late 1920’s, in the same way that Southern Europe did in the 2000’s.
In both cases, it was clear that the capital inflows could not continue
forever, and weakening competiveness brought the end forward.
When the reversal came, Germany was trapped. As foreigners and
Germans alike withdrew deposits, banks were driven into insolvency and
forced to liquidate their assets at very fire-sale prices. The
government had to prop up failed banks; but it could fund deficits only
by borrowing from the banks. Given its commitment to the fixed exchange
rate of the gold standard, that meant that it had to impose ever more
unpopular austerity measures.
Given all of these constraints, there was no easy way out. The path
immediately adopted in the wake of the 1931 banking crisis was to impose
capital controls.
The crisis was a defeat for democracy. The democratic parties’
obvious response was to flee from political responsibility during the
period of the greatest economic hardship. The Weimar Republic’s last
fully parliamentary government had already collapsed in March 1930 under
the political weight of an impossible fiscal dilemma. Spending cuts
alienated the left; tax increases angered the right.
Democratic parties acquiesced in the use of the constitution’s
emergency provisions to bypass parliament and enact legislation in the
form of decrees. In this way, democracy was already substantially eroded
before the appointment of Adolf Hitler as Chancellor in January 1933.
Banking and budget problems, fiscal constraints, and the emergence of
“non-political” technocratic governments: all are horribly familiar to
Germans with a sense of the past. The negative lesson of the interwar
experience – that piling up more fiscal liabilities does not solve the
problem – is already apparent in today’s Europe. But there is a positive
lesson to be drawn as well: the possibility of an international order
that supports rather than undermines democratic regimes at the moment
when they take unpopular measures.
That was the lesson drawn from Weimar by
Konrad Adenauer, Germany’s first post-war Chancellor, and a man who – as
mayor of one of Germany’s high-spending cities in the 1920’s – had seen
the German catastrophe up close. Now, as then, Europe – a community of
shared values – is needed to maintain democracy in nation-states
threatened by economic breakdown.