Published in Business Spectator (Melbourne), 11 October 2012
To international observers, Der Spiegel’s current cover must look rather odd. “Attention! Inflation!” Germany’s leading news magazine warns its readers. The message is underlined by the picture of a melting euro coin and the sub-heading announcing “the creeping expropriation of the German people”.
But has Der Spiegel got its timing right? Germany’s consumer price index recorded annualised increases of 2.6 per cent in September last year, 2.3 per cent in February and 2.0 per cent this September. Not only do these figures not sound like hyperinflation; they even show to a slowing inflation trend.
Obsessing with inflation is a German pastime because inflation is Germany’s national trauma. Other countries report house price increases, cricket results or the weather forecast on their newspapers’ front pages. In Germany, this role is traditionally enjoyed by the consumer price index, no matter where it stands or where it is heading. There are obvious historical reasons for this but also implications for the future – and not just Germany’s.
George Soros once summed it up nicely: “Because of its history, Germany fears inflation more than recession. For the rest of the world, it is exactly the other way around.” What Soros alludes to is Germany’s experience of serious and rapid price increases twice in a century.
In the Weimar Republic, the hyperinflation of 1923 erased the savings of the middle class. After defeat in World War I and the humiliating Treaty of Versailles, hyperinflation delivered another blow to a suffering country and its demoralised people. It also undermined trust in democracy and was one of many steps towards the rise of Hitler.
Hitler’s regime then pursued economic and monetary policies even more irresponsible than those of their predecessors. Rearmament and World War II were financed by the printing press, albeit in a more creative fashion. The so-called ‘Mefo bills’, designed by Reichsbank president Hjalmar Schacht, covertly provided central bank cash to Hitler’s regime. Next to the ingenious Herr Schacht, the current generation of activist central bankers looks like a bunch of amateurs.
After the war, Germany’s complete economic, monetary, and fiscal disaster required another currency cut in 1948. In came the deutschemark and a new central bank, the Bundesbank, with complete autonomy and the sole mandate of keeping prices stable. It was meant to be a break with Germany’s roguish monetary past.
However, what has remained with Germans until the present day, even those far too young to remember 1948, let alone 1923, is the fear of losing their savings. At a total saving’s pool value of around €5 trillion (roughly $6.4 trillion) such fears are easily understood.
But it is not just potential loss of wealth that matters to Germans. Monetary stability is not primarily a technical consideration or an economic goal. It is an existential concern.
At the very least, Germans tend to see stable prices as the prerequisite of democracy and peace. They believe Lenin’s dictum that the “surest way to destroy a nation is to debauch its currency”.
Hadn’t monetary activism made two world wars possible? Hadn’t its effects radicalised a whole generation? Isn’t there a direct connection between the printing presses of the Reichsbank and the gas chambers of the concentration camps? In Germany, these are not so much questions but dogmas.
There is also a more positive way of looking at monetary stability, and again it is deeply rooted in German history. The Germans had lost everything in 1945, not just the war. After the Holocaust there was no semblance left of national self-awareness, let alone national pride. To be German was an unmitigated embarrassment. And what could being German mean anyway in a country divided by the Cold War, torn apart by the Iron Curtain and the Berlin Wall?
There was, however, at least one thing that (West) Germans could be proud of from the mid-1950s: the performance of their economy and the newly-gained stability of their currency.
Over the years, the deutschemark filled the void left by the disappearance of anything linked to the German nation. There may not have been much to be proud of except the deutschemark. As Jacques Delors, the former president of the European Commission, said: “Not all Germans believe in God, but they all believe in the Bundesbank.”
When the euro was introduced, it was Germany that insisted on measures to keep the new currency at least as stable as the deutschemark. This was not just self-interest but the result of a deeply held conviction. Germans saw and still see monetary stability, low inflation and an independent central bank as the path to prosperity. And they also believe that this is the best way to guarantee a functioning democracy.
The measures now taken to “save” the euro are anathema to such beliefs. They challenge everything Germans have come to take for granted over the course of their post-War history.
This is the reason why Der Spiegel can run a cover story on inflation when official CPI figures are still within normal range. It also explains why according to a recently published opinion poll there is nothing feared more by the Germans than inflation. Almost two-thirds said that rising consumer prices were their biggest fear.
It would be easy to belittle such worries by pointing out that the eurozone risks slipping into deflation, or that Bundesbank-style inflation targeting is no longer fashionable. But that would be foolish for at least two reasons.
First, there are some historical lessons about the effects of expansionist monetary policies that Germany had to learn the hard way. They may not predetermine the outcome of monetary policies today, but they should not be forgotten or dismissed. Second, Germany is central to the development of the euro crisis. Any policies that do not take Germany’s political preferences into consideration are bound to fail or at the very least meet fierce resistance.
In a world ruled by quantitatively easing, unorthodox central bankers, Germany’s hard money focus may appear anachronistic. But given Germany’s history, it is entirely understandable for them and should be a lesson for all.