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.

REUTERS/Yves Herman/File
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.

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.

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.

In stark contrast, the beliefs of many of Germany’s competitors, led largely by the Anglo-Americans, have favored the Keynesian approach to monetary policy in which currency depreciation is used as the primary tool to foster economic growth.

From the German perspective, currency debasement destroys the accumulated wealth of savers and the middle class and instead benefits wealthy bankers and politicians. The disparity of these two views – between the easy monetary policies of the Bank of England and the Fed, and the honest money of the German Bundesbank and later the European Central Bank – explains the difficulty in finding common ground in the current crisis.

Twenty years ago, the German people reluctantly sacrificed the Deutsche mark for the euro, even as then-Chancellor Helmut Kohl championed it as a step toward European unity. To reassure domestic skeptics, Germany insisted that the European Central Bank be sited in Germany so that its monetary bias would remain dominant.

In light of this hesitancy, Germany’s current policy becomes clearer. It has set out to convert the euro into a worthy heir of the Deutsche mark. Indeed, many Germans still yearn for the return of their stalwart currency.

Today, many in the United States are arguing that European stability will only come about if the European Central Bank were to exercise the same level of “courage” shown by the US Federal Reserve in 2008 – when it printed money in unprecedented amounts to paper over a collapsing economy. These voices now call on Germany to adopt an Anglo-American-style “quantitative easing.” 

Berlin has steadfastly resisted these efforts. Meanwhile, it reacts enthusiastically toward any moves that would extend its influence over government fiscal policies throughout the continent.

Germany recognizes that it has the potential to break the entire continent’s addiction to Keynesian currency debasement. Such a Europe could offer the world a real distinction from the economic policies of Washington.

Should Germany resist current pressure and succeed in its grand design to reshape Europe in its fiscally responsible image, Europe likely will see a massive economic resurgence.

What Germany chooses to do with its newfound position of economic leadership is quite another matter. If it can use that power responsibly and restore global confidence in honest money principles, those nations that have chosen to place their faith in Keynesian monetary principles may actually find themselves having to keep step with the Germans.

John Browne is senior economist at the brokerage firm Euro Pacific Capital, based in Westport, Conn., and a former member of the British Parliament.

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