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European debt crisis: Germany's fight against Keynes

The European debt crisis provides Germany the opportunity to preach its disciplined approach to monetary policy. Should it succeed in remaking Europe in its monetary image, Europe will prosper. Those who follow the Anglo-American model of Keynsian loose money must fall in line.

By John Browne / January 20, 2012

Britain's Prime Minister David Cameron (R) looks at Germany's Chancellor Angela Merkel (L) at a European Union summit in Brussels in December 2011. The two leaders differ sharply on how to handle the European debt crisis.

REUTERS/Yves Herman/File


Palm Beach, Fla.

As European leaders hurtle toward another make-or-break summit on the debt crisis Jan. 30, Germany’s economic leadership will again be put to the test. At the last summit in December, Berlin was unable to persuade London to back a plan to more tightly bind the economic policies of all 27 members of the European Union.

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British Prime Minister David Cameron bristled at ceding any more sovereignty to the continent. But I suspect that his real fears are with German Chancellor Angela Merkel’s support for monetary discipline. Despite his austerity budget at home, Mr. Cameron nevertheless follows the Anglo-American preference for monetary easing as an economic panacea in tough times.

And it’s not just Cameron who shares this view. So do leaders such as Christine Lagarde, head of the International Monetary Fund, and Italian Prime Minister Mario Monti. In the new century, the currency printing press has replaced the machine gun as the primary weapon in European power struggles.

The Germans would never put it this way, but they’re actually in the process of building a new “empire,” an economic one that holds honest money as a cardinal virtue.

In light of history, most Europeans have been keenly unwilling to yield economic sovereignty to Germany, or more accurately, to the German way of doing things. But as Europe’s economic powerhouse, and its national lender of last resort, Germany finds itself in an unusually strong bargaining position. In fact, several key European leaders have recently said that fears of a timid Germany now outweigh fears of an emboldened Germany.

For centuries, German unification was prevented by European politics. When the country finally came together in the late 19th century it was far behind its weaker rivals (notably France and the United Kingdom) in the acquisition of empire. The Franco-Prussian war and the two world wars were a testament to Germany’s drive to make up for lost time.

The defeat of the Nazis and the cold war nightmare of a divided nation did not end its dreams of international leadership commensurate with its economic strength – though it changed the means and nature of that leadership (seeking a permanent seat on the UN Security Council, for instance, and taking the lead in the debt crisis).

After its reunification less than 20 years ago, Germany, with only 82 million people, became the world’s largest exporter (until it was surpassed by China in October 2010). Its economic “miracle” of the post-war years was grounded primarily in an ethic of hard, effective work, the accumulation of capital through export strength, and a disciplined, anitinflationary approach to monetary policy.

More than any other major economic power, Germany has embraced an economic philosophy known as the “Austrian school,” which places a particular emphasis on sound money. By the 1990s, the Deutsche Mark had become one of the world’s preeminent currencies.


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