Skip to comments.Niall Ferguson: Return of the German nightmare (HOLD MEIN BIER, MEIN FURHER ALERT)
Posted on 11/23/2002 4:03:19 PM PST by MadIvan
As Chancellor Schröder grapples with a seriously sick economy, he is making the same mistakes which led to the 1930s crisis that opened the door for Hitler, writes historian Niall Ferguson
Never say the Germans lack a sense of humour. They like to call Frankfurt Mainhattan (a pun on the River Main on whose banks it stands). What makes that funny well, almost is the yawning gulf between Germanys financial capital and its American counterpart on the Hudson. New York has had its troubles just lately. Quite apart from 9/11, theres no guarantee that the slide on the American stock market is over, and Wall Streets finest have been shedding jobs the way Christmas trees shed needles. But the mood there remains defiantly optimistic. And with some reason.
Monetary policy is in the hands of Alan Greenspans Fed, which has aggressively cut interest rates since the bubble began to deflate. And fiscal policy, not to mention foreign policy, is in the hands of the Republican party. Say what you like about George W Bushs tax cut: its popular on Wall Street.
The mood in Mainhattan, by contrast, verges on the suicidal. When I was in Frankfurt last month my German publishers were stony faced. Were for sale, they confessed. Normally at the Frankfurt book fair German publishers talk about buying other peoples books. The only books being talked about this year were the ones the publishers themselves would be writing after being made redundant.
The crisis in German publishing is part of a wider crisis in the German media. The big newspapers are being hammered by the collapse of classified advertising revenue. And that is just a symptom of the malaise throughout the German economy.
It seems like only the other day that the new Labour guru Will Hutton was urging Tony Blair and Gordon Brown to copy the German model of a social market economy. Huttons book was called The State Were In. A book about the German economy today would have to be called The State Theyre In.
A sure sign that things are going wrong in Germany is when people start using the W word as in Weimar. Only last week the former finance minister Oskar Lafontaine likened Chancellor Gerhard Schröder to Heinrich Brüning, the chancellor whose economic policies in the early 1930s are often blamed by historians for wrecking the Weimar Republic.
It is as if Heinrich Brüning has risen again, Lafontaine said. He caused mass unemployment with his savings measures and prepared the ground for Hitler. Lafontaine was alluding to Schröders decision to cut spending and raise taxes at a time of rising unemployment the same masochistic and ultimately self-destructive tactic adopted by Brüning.
True, there is no love lost between Lafontaine and Schröder, who are old and bitter political rivals. But the Weimar parallel is being drawn by historians, too. In the words of Arnulf Baring: Todays crisis can be compared to the end of the Weimar Republic . . . the symptoms of economic and political disaster are the same.
To the many pundits who predicted that the reunification of Germany would create a superpower at the heart of Europe this has all come as a shock. The reality seems to be that since acquiring East Germany the federal republic has become the sick man of Europe bigger, yes, but weaker.
Certainly, the economic crisis in Germany today is nowhere near as bad as that of 1929-1932. And the political consequences will not, repeat not, be a surge of neo-Nazism though a swing to the (parliamentary) right is under way. But what is undeniable is that government policy is pro-cyclical tightening fiscal and monetary policy when it should be relaxing it, just as Brünings was in 1930.
So just how bad is Germanys economic crisis? According to the International Monetary Fund only two of the worlds developed economies have performed worse than Germanys in the past decade: those of Japan and Switzerland. Since 1994 per capita gross domestic product in Britain grew at an average annual rate of 2.4%; the German figure was 1.5%.
Unemployment in Germany is 8.3% and 5.2% here. It is forecast to rise to 4.3m one in 10 of the workforce and will almost certainly worsen. Germany has just come out of recession but growth was just 0.25% in the last quarter.
The German stock market is a disaster zone: the DAX has slumped by more than 50% in the past two years and the once glamorous Neue Markt, set up to trade technology stocks back in the 1990s, has vanished. German banks and insurance companies are in the doldrums.
The newly re-elected governments response? Spending cuts and tax hikes totalling £2.3 billion. The measures, including higher state pension contributions and an increase in capital gains tax, have outraged German voters. In the eyes of German investors, Schröder and Hans Eichel, his finance minister, might as well have hoisted the Jolly Roger.
So what has gone wrong? There are two answers, only one of which German politicians dare mention.
The mentionable explanation is that Germany didnt have the 1980s in the way that Britain and America did. While Thatcher and Reagan liberalised their labour markets and hacked at their sclerotic welfare states West Germany under Helmut Kohl took the line of least political resistance.
The result is that the country has one of the most rigid and expensive labour markets in the world non-wage labour costs account for two-fifths of gross pay and a lavish welfare system that its ageing population can no longer afford.
Reunification concealed these problems for a few euphoric years because to finance the integration of the former German Democratic Republic, West Germany went on a borrowing spree. Billions were thrown at the problem, though much of the investment ultimately took the form of unemployment benefit and other handouts for East Germans.
(The decision to convert the East German currency to deutschmarks on a one-to-one basis wrecked the much less productive East German manufacturing sector at a stroke.) Thirteen years after the fall of the Berlin Wall, the consequences of all this are most clearly legible in the German budget. More than two-fifths of government spending now goes on civil service pensions; 16% is consumed by the interest on public debt.
Yet these structural problems are not in themselves insuperable. German productivity growth remains the fastest in the developed world, rising ahead of labour costs. The governments fiscal problems are severe but not insoluble.
So the other, far more serious, explanation for Germanys travails is the one that no German politician dares to mention. It is, quite simply, the euro.
Consider a counterfactual question: if there were no single currency what would German economic policy be like today? First, monetary policy would still be in the hands of the Bundesbank, rather than its neighbour the European Central Bank. And as a result German interest rates today would be significantly lower, for the simple reason that German inflation is lower than average eurozone inflation.
Secondly, there would be no reason for the European commission to launch an excessive deficit procedure against the German government for running a budget overshoot of 3.8% of GDP. This is a rich irony, for that very procedure was devised by the Germans themselves. It was Eichels predecessor, Theo Waigel, who insisted on a growth and stability pact as the precondition for German membership of the euro.
His fear was that without such a pact, feckless types he had in mind the Italians would run large budget deficits that would undermine the stability of the currency: hence the pacts rule that deficits must not exceed 3% of GDP. Little did the Germans suspect that they would be the second transgressors singled out for chastisement, after Portugal.
At which British readers will likely snort: hoist by their own petard. But the stagnation of the biggest economy in Europe can be no cause for schadenfreude.
The crisis that I and others long ago predicted for the euro has now arrived. The conflict we foresaw between a centralised monetary policy and divergent national fiscal policies has arisen. In 1930 Brüning made the mistake of putting international considerations ahead of domestic economic stability. His prime objective was to get rid of post-war German reparations. Todays equivalent is a blind faith in the growth and stability pact.
German politicians remain paralysed, incapable of acknowledging that, at the very least, the growth and stability pact needs to be junked, something even Romano Prodi, the president of the European commission, now accepts. But if the history of the Weimar Republic has any lesson for Germany today, it is to beware the wrath of German voters when the fruits of foreign policy are stagnation and instability.
Niall Ferguson is professor of political and financial history at Oxford University
My grandfather was right, "The Hun is either at your feet or at your throat."
"But how can you have abandoned something like that, when we drew inspiration from your system by introducing the ECU?! Our ECU is a European adaptation of what you did in COMECON."
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