Anyone old enough to remember the Weimar Republic would only have been a child when hyperinflation wiped away savings in 1921-24, but the calamity is so ingrained in Germany’s collective memory that it still shapes its thinking on the euro.
Foreign leaders urging Germany to relax its resistance to the European Central Bank becoming a “lender of last resort” and printing money to solve the sovereign debt crisis can save their breath: Germany won’t budge.
Chancellor Angela Merkel may have ceded once non-negotiable positions on many of the hurdles in the sovereign debt crisis, but unless she is politically suicidal, there is one line she will not cross: the independent role of the central bank.
“We mustn’t forget the German government has elections in 2013 and Mrs Merkel has to consider this,” said economist Manfred Neumann. “She cannot win if she looks too weak in the euro context, and she has made a lot of concessions already.”
To understand why this would be one concession too far, you can rifle through the numismatic counters at flea markets and tourist stalls in Berlin, where curious bank notes from the 1920s in denominations of hundreds of billions and even trillions of marks go for a few euros.
Such galloping inflation, when prices doubled every day, resulted from the efforts of the Reichsbank, Germany’s central bank until 1945, to ‘monetize’ government debts swollen by reparations for World War I by creating money to buy them up.
By late 1923, a liter of milk cost some 26 billion marks and a loaf of bread 105 billion. Shopping involved carting piles of cash around in barrows and baskets in such quantities that it had to be weighed on scales rather than counted by shop tellers.
Grainy photos from the time show people papering their walls with the currency and children using bundles of cash as building blocks. The chaos contributed to the rise of Adolf Hitler, who first tried to take power in Munich’s “Beer Hall Putsch” at the height of hyperinflation in 1923.
“It is deeply embedded in the German psyche,” said Neumann, emeritus economics professor at Bonn University.
He sees parallels between the Reichsbank’s determination to save Germany from its war debt and the ECB tackling the euro crisis via much-criticized purchases of Greek and Italian debt.
The current successor to the Reichsbank, the Bundesbank, nicknamed the Buba, was set up in Frankfurt in 1957 as a fiercely independent central bank whose core task was to guard against inflation.
It carried out this role with great success, turning the Deutsche Mark into one of the world’s most stable currencies, until the ECB took over this role just over a decade ago with the advent of the euro, the European Union’s common currency.
One challenge to its authority came on the reunification of East and West Germany in 1990, when chancellor Helmut Kohl ignored Bundesbank warnings about the inflationary risks of swapping wages and basic savings in the communist currency for Deutsche Marks at a 1-to-1 exchange rate.
This forced up wages in the East, causing layoffs and encouraging migration to the West. Some economists say the central bank’s reputation was tarnished by Kohl putting the political allure of currency union above core concerns about inflation.
It was seen at the time as a warning that impending European Monetary Union − the precursor to the euro − had to guarantee the independence of a future European central bank and its exclusive aim of safeguarding price stability.
Now the German government and the Bundesbank, which has one vote on the ECB board, like the other 16 member states including troubled Greece and Italy and tiny Malta, are warning that the European Central Bank is straying from this core task.
Two German members of the ECB board have left this year in disgust at the bond-buying strategy. Bundesbank chief Jens Weidmann blocked attempts at the G20 summit to make further inroads into central bank independence by purloining Bundesbank gold and currency reserves to boost euro zone bailout funds.
“Bundesbank prevents trickery by euro partners,” was how the top-selling news magazine Der Spiegel hailed Weidmann’s stand.
Economy Minister Philipp Roesler − head of Merkel’s Free Democratic (FDP) allies, struggling with a euro-skeptic mutiny − promised solemnly that German gold “will not be touched”.
Neumann, who supervised Weidmann’s doctoral thesis, saw no chance that the Bundesbank or Berlin would let gold, currency or
special drawing rights of the International Monetary Fund, also held as reserves, become collateral to boost the firepower of the 440 billion euro European Financial Stability Facility (EFSF).
“Gold or special drawing rights − it makes no difference. If you agree to SDRs, then a month later they will come and say ‘Now what about the currency reserves?’” he said.
Neumann said the last time a German finance minister wanted to sell gold, to plug a budget gap in 1997, “German economists protested and the Buba said ‘no’ and it was over.”
Rather than ceding ground in the current central banking debate, Merkel’s ruling conservatives are on the offensive, threatening to seek more German influence over the ECB.
Conservative sources said a resolution would be proposed at her Christian Democratic Union’s (CDU) congress in Leipzig next week demanding changes to the ECB that would give euro member states voting rights weighted according to the size of the economy − meaning Germany would get the biggest say by far.
Germany’s ECB partners are about as likely to approve such radical changes as turkeys to vote for Christmas, but some media saw it as a patriotic CDU bid to “make the ECB more German.”
With Merkel finally getting plaudits in the euro zone crisis for talking tough with Greece and Italy, rather than dithering as she did early on, Berlin is unlikely to compromise on an issue like central bank autonomy, which is drummed into German schoolchildren with the risks of hyperinflation and the Nazis.
In principle, of course you can say government spending can be financed through taxes or debt or monetizing debt, it doesn’t matter,” said Neumann. “But from the German historical point of view, it does.”