Wheelbarrows of cash spectre still stalks Germans
THE BACK streets of Berlin are filled with Trödelläden, junk shops creaking under the weight of heavy oak furniture that nobody wants. Between the wardrobes and tables, you’ll often find a tin box filled with family photographs and yellowing banknotes from the German Reichsbank in denominations of 50 and 100 million marks, writes DEREK SCALLY
For an outsider, these banknotes are retro monopoly money; for Germans they are paper proof of how, twice in the last century, hyperinflation raged through their economy, erasing wealth and destroying lives.
To distant Irish eyes, German hyperinflation was little more than a history book photograph of a boy with a wheelbarrow of banknotes on his way to the bakery. In an era of credit cards and online banking, where banknotes themselves have begun to lose their meaning, it’s difficult to imagine the damage hyperinflation did to the German psyche and how it has coloured their attitude to money and monetary policy.
After the second World War, itself a link in the chain stretching back to 1920s hyperinflation, West Germans eyed their politicians and democratic institutions with suspicion. Instead, they pinned their trust on the strong deutschmark and the independent Bundesbank. This trust was well-placed and the mark became their passport to the prosperity of the Wirtschaftswunder, or economic miracle.
Signing away the deutschmark for the euro, chancellor Helmut Kohl insisted the common currency, overseen by an independent European Central Bank (ECB), would carry on the Bundesbank’s tradition of inflation-fighting price stability.
With this euro promise now dented, Chancellor Angela Merkel finds herself juggling the need to stabilise market confidence in the euro, while salvaging the currency’s reputation in the eyes of the German public.
This leaves Berlin and its euro zone neighbours with the ultimate chicken and egg question. Which should come first: common euro zone debt certificates to defuse the time bomb of national bond spreads, or binding EU budgetary oversight rules, requiring treaty change?
The history of EU stand-offs suggests a deal will involve a lot of horse trading and a final compromise that all sides can sell as a national triumph.
Without Germany, the only major euro zone economy still with unquestioned creditworthiness, there can be no eurobonds. But Germany cannot make a political commitment to eurobonds without economic rules to prevent the euro’s second decade being a repeat of the first.
In the German nightmare scenario, agreeing to no-strings eurobonds would give Athens back a credit rating similar to that of Berlin, allowing it, once again, to borrow like a German and live like a Greek.
Germany is anxious to keep up the political pressure as long as possible, believing in what Bundesbank president Jens Weidmann on Tuesday termed “the healing properties of high interest rates” to drive structural reform.
Off the record, leading German politicians point out they have never ruled out definitively the idea of eurobonds – just not at the moment. A road map to a euro zone compromise deal is taking shape.
For his part, finance minister Wolfgang Schäuble has conceded in private he is quite taken with a proposal by Germany’s “five economic wise men” for a European Redemption Fund.
This proposed structure would take over sovereign debt of all countries that break the EU’s limit of 60 per cent of gross domestic product in return for strict economic oversight and constitutional debt brakes to bring debt burdens back in line with EU rules.
The European Commission sees overlap between this idea and its own proposals offering “stability bonds” in return for binding austerity measures and EU budgetary oversight. In the two weeks to the next EU summit, expect a lot more megaphone diplomacy from all sides, particularly on the future role of the ECB.
Germans insist their defence of an independent ECB is not driven by moralising but a need to defend the currency’s foundation. Widening the ECB’s mandate to make it a lender of last resort would, through the lens of German historical experience, amount to moving the goalposts to allow political influence over the institution.
Thus the attraction of turning an ECB monetary bazooka on markets is, for Germans, tempered by the historical fear this would work for only a short time. The markets would eventually realise the euro zone was as fragile as ever, and the last dyke in the euro zone defences – an independent ECB – would be compromised, and the water would rush in.
Given Ireland’s recent experience with the bank guarantee scheme, Germany is understandably wary of calling markets’ bluff. Berlin says its historical experience remains relevant in a euro zone crisis of dizzying rescue packages, where millions and billions have already lost all meaning.
German resistance to letting the ECB stockpile worthless national bonds in its cellar is tempered by a real fear the euro zone will end up as a tin box stuffed with 50 million euro banknotes in a Berlin junk shop.