Weimar Europe? -- Harold James

[Jeezy]

Weimar Europe? - Harold James - Project Syndicate

Germans are right to notice the parallels between conditions in Europe today and those in the interwar period. The similarities consist in the implications of the choice of currency regime for political behavior and democratic legitimacy.

At the end of its hyperinflation, (Weimar) Germany locked itself into a currency regime, the international gold standard, which was deliberately designed to be so limiting that exit was impossible.

The anticipated consequence was that the country would appear credible and become attractive to foreign capital.

As the strategy worked, capital inflows sparked both public-sector and private-sector booms. Governments at all levels funded politically attractive but expensive infrastructure projects.

But there was a downside. The boom’s vigor, coupled with prior experience of inflation, led to wage increases that were not matched by productivity gains. As a result, Weimar Germany lost competitiveness in the late 1920’s, in the same way that Southern Europe did in the 2000’s. In both cases, it was clear that the capital inflows could not continue forever, and weakening competiveness meant brought the end forward.

When the reversal came, Germany was trapped. As foreigners and Germans alike withdrew deposits, banks were driven into insolvency and forced to liquidate their assets at very fire-sale prices. The government had to prop up failed banks; but it could fund deficits only by borrowing from the banks. Given its commitment to the fixed exchange rate of the gold standard, that meant that it had to impose ever more unpopular austerity measures.

Given all of these constraints, there was no easy way out. The path immediately adopted in the wake of the 1931 banking crisis was to impose capital controls.

The crisis was a defeat for democracy. The democratic parties’ obvious response was to flee from political responsibility during the period of the greatest economic hardship. The Weimar Republic’s last fully parliamentary government had already collapsed in March 1930 under the political weight of an impossible fiscal dilemma. Spending cuts alienated the left; tax increases angered the right.

 

[Gimmesometruth]

The problem is that the EU is facing too little inflation which is going to cause problems in bringing down debt levels. German opposition to inflation, even modest levels, will seriously hamper efforts to help Greece, Spain, Ireland and Italy.

Euro Agonistes - NYTimes.com

 

[Oberon]

I don't see even a remote comparison with Wiemar Germany. I guess the guy had to fill some space, so just invented some pseudo-intellectual tripe to get a paycheck or something.

Germany's hyperinflation after WW I was deliberate, and the U.S.'s mindless insistence that the Reich Bank be completely independent from the Reichstag and operate on laissez faire principles led to the usual collapse laissez faire lunacy always ends up at, bankruptcy and utter corruption. The Bank directors could make a pile on insider currency trading in the Amsterdam money markets, and that's what they focused on.