German obsession with inflation is based on myths

Opinion: Separating historical fact from fiction is a thankless task in Germany but one man is trying to do just that

A 10-million mark note from 1923 at the height of the hyper-inflation days of the Weimar Republic. Photograph: iStockphoto

A 10-million mark note from 1923 at the height of the hyper-inflation days of the Weimar Republic. Photograph: iStockphoto


Every euro area government has framed the ongoing crisis to suit its own political and economic concerns.

Many have chosen austerity, warning that excessive cutbacks in a downturn risk sending economies into a destructive downward spiral.

Austerity is rarely mentioned in Germany. Here, the crisis buzzword is inflation. The fear that crisis-fighting measures will spark runaway prices in the euro area has awoken from decades of slumber the underlying trauma in the collective German psyche.

Fear of inflation colours the German public debate like no other, triggers regular Bundesbank shots across the European Central Bank’s bow, limits German politicians’ policy options and has a knock-on effect on the reform policies Berlin demands of euro crisis partners.

That Germany’s fear of inflation is more fear than fact, judging by ECB statistics, makes no difference.

Now Mark Schieritz, finance correspondent with Die Zeit weekly, has taken aim at this sacred cow of German monetary policy in The Inflation Lie .

He opens his book by exploding three myths about inflation, long-shattered elsewhere in Europe but still alive and well and living in Germany. The first: that inflation led to Hitler. Schieritz points out that, while the hyperinflation of the crisis-racked Weimar republic ruined many middle-class German families, the Nazi leader rose to power at a time of deflation and economic stagnation.

“The main economic reason for the success of the Nazis was the high unemployment in the world economic crisis,” he writes. “For many German families that was far more ruinous than inflation and yet it is remarkable that the inflation and not the depression has left a mark on German collective memory.”

Second myth
The second myth is the maxim of Ludwig Erhard, father of West Germany’s “economic miracle”, that inflation is a “disappropriation without compensation in favour of the public purse”.

In other words: savers and pensioners pay a disproportionate price for political mismanagement of the economy.

As Schieritz points out, inflation in the golden Erhard era was 2.5 per cent, compared to the last decade’s euro area average of 1.5 per cent.

The third myth is the widespread view in Germany that the crisis-era euro area is swimming in money – and thus on the brink of a new wave of inflation – as a result of ECB crisis-era efforts to provide unlimited liquidity to ailing banks.

He sees this as a phantom menace and pins blame on Germany’s countless euro Cassandras who, though they know the difference, conflate money generated by the ECB to get banks lending again with the money circulating in the wider economy.

As a result, he suggests, the gaze of ordinary Germans is fixed in fear on a money tidal wave on the horizon, paralysed by an inflationary risk that has never, and will never, hit the shore.

Little of the €442 billion created by the ECB in December 2009 at the height of the crisis ever found its way into cash-starved real economies of the euro area. “It is one of the great deficits of the monetary policy debate in Germany that this is practically never discussed,” he writes.

“That central banks destroy money as easily as they create it – on a computer screen – is not believed in Germany. Generating money is viewed here like squeezing the tube of toothpaste, you cannot get it back in.”

Inflation and its risks have always been misunderstood in Germany, he suggests.

Even at the height of the Weimar-era hyperinflation, Schieritz argues that the real effect was different to the media narrative that later coloured collective historical memory.

Contemporary reports of hyperinflation, he suggests, were heavily weighted towards the experiences of middle-class journalists and their circle of friends whose savings were wiped out. This ignored the reality of millions of working class Germans who were paid daily with ever-bulkier bundles of banknotes corresponding to the latest value of the runaway Reichsmark.

Separating this historical fact from fiction is a thankless task in Germany, he says, because the image of overheated money printing presses has seared itself into the German psyche.

This has, in turn, created a deep-seated trust in monetary rules and, conversely, a mistrust of pragmatic politicians and institutions to do the right thing in a financial crisis.

Schieritz hopes his book will enlighten the ordinary German reader and challenge the dominant inflationary narrative.

Besides Die Zeit there are few media outlets in Germany presenting the other side of inflation = Hitler argument. Instead the debate is dominated by a conservative-monetarist elite of politicians, bankers and economists. Their house journal: the Frankfurter Allgemeine Zeitung , has led the charge against the ECB bond-buying and other crisis measures.

Schieritz doesn’t name names or media organisations in his book. The arguments he makes are well known to all in financial and media circles, he says, but not given an airing because they risk undermining the established narrative.

There is little interest in challenging the status quo in German financial circles because fear of inflation has been a nice earner for them. Reports of a price spiral has set fearful investors rushing for bricks and mortar, driving up property prices in major German cities.

Crisis narrative
The chances of changing Germany’s crisis narrative are low, Schieritz suggests, because it is shaped by a small economic elite schooled in a supply-side monetarist tradition, whose students enter journalism and politics and amplify this thinking to the wider public.

For Schieritz, educated at the London School of Economics, this dominant economic tradition in Germany is “less a scientific method than a world view”.

There is no point in outsiders getting involved in the German inflation debate, he suggests, because no one dares give an inch. But all is not lost. Actions speak louder than words, he says, with Berlin beginning to show a greater political flexibility on the crisis – just don’t expect them to shout about it in public.

“Behind the scenes, it’s clear that German politicians are doing far more in the euro crisis than they will ever admit in public here.”

Derek Scally is Berlin Correspondent

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