Why Germany will save the euro
Page 1 of 4
Michael Collins is an investment commentator with Fidelity Worldwide Investment.
Germany's abhorrence of inflation is easy to explain. The Weimar Republic (1919 to 1933) hosted hyperinflation between 1921 and 1923, when authorities printed money to overcome the disruption caused by political instability and war reparations. Savings evaporated as prices rose 130 times over in 1922 before the papiermark became valueless in 1923.
Inflation wrecked savings again around the end of World War II. While inflation's scourge was first suppressed by rationing and price controls, its devastation was wrought when the Reichsmark was exchanged for the Deutschemark at a rate of 10 to one in 1948.
Over the past decade, inflation fears were revived when, after joining the euro at too high a rate in 1999, Germany undertook austerity-like reforms to become more competitive, and wages and public benefits stagnated.
As these inflation fears were stirring in today's Germans (even though inflation only peaked at 3 per cent in 2007), they were footing the cost of reunification. Deutsche Bank calculates that by the middle of this decade, the merging of West and East Germany since 1989 will have cost the equivalent of Germany's annual GDP.
This history explains Berlin's stances during the eurozone crisis against inflation and its reluctance to salvage another economy, even if past rescues have, in effect, bailed out German banks while shifting risks to eurozone taxpayers.
Citing the moral hazard of saving cheating Greece and other troubled eurozone members, the centre-right government of Chancellor Angela Merkel has pushed the self-defeating policy of austerity over the past two years.
She is undeterred, even though this policy has caused record eurozone unemployment (11 per cent), heavier government debt burdens and steeper economic slumps. Her tough approach led to the eurozone fiscal compact that makes Keynesian stimulus illegal.
Germany's other stances during the crisis are more about what it opposes. Berlin is resisting financial-stability powers for the European Central Bank (ECB), such as an ability to meet bond payments. It is against more cheap liquidity from the ECB, which gave banks 1 trillion euros (A$1.3 trillion) via three-year repos around New Year.
Berlin rejects eurobonds or similar collective efforts to underwrite eurozone sovereign debt, which would boost yields for German businesses and mean that Germany would help foot the bill for any default.
It has baulked at a banking union, which would involve a recapitalisation fund and deposit guarantees. It cringes at higher inflation in Germany of, say, 4 per cent to 6 per cent that would help erode the real debt burdens of its neighbours.