Germany needs to free itself from the shackles of history

By Roger Boyes, December 12, 2011
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It is a mere scrap of paper, as brief as a shopping list. "Ten uses for money" is written at the top with helpful hints as to what Germans can do with their Reichsmarks: wallpaper their living rooms, burn them as winter fuel, use them to prop up broken chairs.

My Weimar-era memento, fished out of a Berlin flea market, may have had satiric intent when it was written. But Germans still find it difficult to laugh at the hyper-inflation of the 1920s, when their banknotes were carried in wheelbarrows rather than purses.

The dull throb of anxiety colouring Chancellor Angela Merkel's much-lamented, much-mocked indecisiveness in the Euro crisis is that rampant inflation makes for dangerous politics.

In Germany, at least, loss of faith in the currency led to loss of trust in the political class - and thus paved the way for Hitler's rise. All modern German fiscal policy seems to be informed by this fear: the rigour of the Bundesbank, its strict political independence. Any crack in the fortress walls of the central bank, it seems, could open the way for the return of the inflationary dragon.

Merkel may have read the wrong lessons

In daily life, too, decisions are made on the assumption that inflation must remain low. Thus, Germans rent their homes, knowing that house purchase represents a poor investment.

Chancellor Helmut Kohl, Merkel's mentor, promised the Germans that the euro would be as hard as the beloved Deutsche Mark. The European Central Bank was placed in Frankfurt, its custodians selected for their Germanic orthodoxy. And now, Merkel rules out one of the more obvious routes out of the crisis: allowing the ECB to loosen monetary policy, spending billions on the purchase of bonds. Her stubbornness on this is so entrenched, it is almost noble. Germany, Europe's biggest economy, should provide the solution rather than contribute to the market slalom that is dragging down its currency

But here's the rub. Merkel may have read the wrong lessons from the Weimar inflation. Hitler came to power in 1933 - when inflation had been brought under control and the real, radicalising background was a deep economic depression. It is the enforced austerity programmes currently squeezing Europe that could bring revolt and rapid impoverishment, that could bring populist euro-hating extremists to power. Merkel smells the danger but draws the wrong conclusions.

Her aversion to moral hazard, her determination to enforce good housekeeping, steers her away from using the ECB creatively. Instead, there is an unhealthy concentration on setting out rules of conduct and an eagerness for Greece and Italy to be governed not by party politicians but by what are, in effect, civilian juntas of technocrats.

Merkel's most successful stint in government, in 2005, was at the helm of a grand coalition of her Christian Democrats and Social Democrats, a team that in effect excluded serious opposition. This much, Merkel has learned from growing up in East Germany: don't trust the people.

There is another way of dealing with this crisis, which entails Merkel reinterpreting history. One commentator argued this week that, if Germany had printed more money in the 1930s, "the biggest catastrophe in history could have been avoided". Another said that the risk of sticking to this strategy "is that ever-more austerity creates ever-more deflation which creates ever-more misery in ever-more troubled countries".

I didn't think I would ever be the one to urge a German leader to free herself from the shackles of history. Call me old-fashioned but I prefer my Germans shackled. But the time has come for Germany to take risks in Europe, to accept that it has a dominant position and be more assertive.

It needs to do so as an act of solidarity with southern Europe, out of awareness that it, too, lent recklessly and out of a sense of national self-preservation. No one is asking Merkel to be a European visionary, just to be flexible.

My reading of the German mood is that, contrary to their chancellor's over-cautious instincts, many are ready to accept a higher rate of inflation as the price of holding the euro together.

After all, the massive inflation following the First World War was intended to destroy trust and, by depreciating the mark, wriggle out of Germany's foreign debts. The ECB, by easing its monetary policy and acting as a lender of last resort, would be aiming to do the opposite: to boost faith in the currency and the EU's leadership. It is for Merkel to spell out the difference to her citizens. That is leadership: to address and help overcome a nation's self-doubt.

Roger Boyes is diplomatic editor of 'The Times'

Last updated: 11:24am, December 12 2011