Germany's Response to the Euro Crisis

From Charlemagne, at the Economist, "Between two nightmares: Angela Merkel is drawing the wrong lessons from the chaos of German history":

A STAMP collection in Berlin’s German Historical Museum sums up what, to many Germans, is the price of economic recklessness. A Weimar-era postage stamp worth five pfennigs in 1920 doubled in price the following year, then jumped to ten marks in 1922. It cost 30 marks in January 1923, 1,000 marks in May and 800,000 marks in October. By the end of 1923, sending a letter took ten billion marks. Next to this “document of an insane era”, the museum shows how worthless banknotes were defaced by Nazis with caricatures of Jewish speculators. It was at the height of hyperinflation, explains the display, that Hitler staged his failed Munich beer-hall putsch.

The moral is clear: profligacy leads to economic chaos, political extremism and ultimately to catastrophe for all of Europe. For today’s Germans, prosperity and democratic order must be based on sound money. The German chancellor, Angela Merkel, is in tune with this domestic mood when she insists that the euro zone must embrace a culture of financial stability if it is to overcome its debt crisis.

But is she drawing the wrong lessons from history? It was not hyperinflation in the 1920s but depression and mass unemployment in the 1930s that propelled Hitler to power. Like the hapless Weimar chancellor, Heinrich Brüning, Mrs Merkel is accused by critics of hastening disaster by pushing austerity during a deep recession. But whereas the 1930s is seared in American memory, it is less clearly remembered in Germany. The reason, says Professor Carl-Ludwig Holtfrerich of the Free University of Berlin, is that Germany returned to full employment more quickly, thanks partly to Hitler’s own form of Keynesian stimulus: notably autobahn-building and rearmament.

The prospect of a 1930s-like breakdown now is perhaps most palpable in Greece. In the fifth year of recession, Greeks chose in May to vote in large numbers for the extreme left and right, punishing mainstream parties that supported the austerity and reforms which came as conditions of the country’s bail-out. Even in the best scenario, in which centrists return to power in this weekend’s second election, a “Grexit” might only be delayed. And once the idea takes hold that a euro member can be pushed out, nobody knows where it will stop.

Contagion from Greece has clearly spread to Spain, which this week was promised up to €100 billion ($125 billion) in euro-zone loans to prop up its crippled banks. If Spain is touched, Italy is sure to follow and France may not be so far behind. As one observer in Berlin puts it, Germany’s real fear is not that the euro zone unravels to the Alps, but that it collapses all the way up to the Rhine. That is an existential threat for Germany, not just economically but also politically; its post-war rehabilitation and prosperity is built on reconciliation with France and deeper European integration.

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The pressure's on for Germany to save the Euro, and for practical purposes, that means even greater integration in a banking union, more rescue funds for EU institutions, and continued emergency bailouts for the worst off economies at the periphery. I doubt Germany will be able to hold up the entire European project. But Merkel's Christian Democratic Party has been getting hammered domestically, so she might shift toward even greater intervention. That said, see Telegraph UK, "It’s a poker game, and Angela Merkel will win."

See also London's Daily Mail, "Angela Merkel rejects quick solution to eurozone crisis as Spain's borrowing costs soar past critical 7% 'bailout level' following savage credit rating downgrade."