One can sympathise with both the attitude of the previously pampered Greeks and the German people in this present crisis in Europe. No sooner have the Greeks accepted one austerity plan than they have been asked to accept another, while the poorest 20% of German people, who have never been pampered, feel outraged at putting their hands in their pockets yet again. Yet this long drawn out crisis is now coming to an ugly head. The battered Greeks are protesting that they never received any war reparations for the devastation the Nazis caused in World War II, while Germany is refusing to back any EU or IMF plan for aid to the country unless it is on its terms. How come that we never realised that Germany was so strong and capable of taking control of Europe before?!
Neither Britain’s former Prime Minister, Gordon Brown, nor indeed American President, George Bush, realised the significance of Germany’s decision in January 2007 to increase VAT in order to reduce its fiscal deficit and then to push for a rise in European interest rates to curb possible domestic wage demands. This was because Germany was considered to be the ‘sick man of Europe’. Although it had hefty exports and a huge industrial base, its GDP growth had been the weakest in the EU up to 2004 and its unemployment had stood at over 11% in 2005. Surely, people reasoned, if this sober country, with its aging population, decided on measures to put its house in order its policy could not affect other nations?
Yet it did and there are worrying historical parallels. Germany also had a strong industrial base and large exports at the onset of the Great Depression but as it declared it was too poor to pay its war reparations so many times people came to believe it, especially when German unemployment soared. Yet, aided by a savage programme of rationalisation, its steel industry became more efficient than America’s by 1930 while the Economist reported on ‘a further remarkable increase in the output per man-shift’ in its coal industry. Indeed Germany’s industrial rationalisation helped it become the world’s greatest exporter in 1931, with a mountain of cash in the bank. It continued its deflation, however, till Hitler came to power and because it was so strong it caused misery and unemployment throughout the western world.
My book accuses prominent German politician and newspaper baron, Alfred Hugenberg, of being largely responsible for the 1929 Wall Street crash because of the horror caused by his successful petition for a referendum to try the German President for treason for accepting the latest war reparations agreement and the Treaty of Versailles. The 2008 crash, in contrast, has generally been attributed to the failures of the open-market capitalist system. Yet Germany’s economic policy today is becoming remarkably similar to the policy it adopted in 1930.
Germany is resolved that its budget should be almost in balance by 2015 and is already planning heavy cuts in spending to achieve its aim. Unfortunately, however, Germany is not acting in a vacuum. Its policy will have wide repercussions, especially on its poorer neighbours in Southern Europe. Indeed, with countries like Greece and Spain already reeling under their own budget cuts, its timing seems remarkably ill-judged.
One worries at Germany’s deflationary policy today because German Chancellor Brüning revealed his intention in 1930 to use deflation for political ends. He felt that the short-term misery of the German people was acceptable in order to achieve his long term ambitions.
We do not know whether Germany’s present deflationary policy hides a political agenda. As in 1931, however, it looks as though it will eventually result in a banking crash, even if the Greeks get bailed out in the present crisis.