Germany – an emerging superpower? Comparisons with the 1930s

THE EUROPEAN JOURNAL, MAY 2008:

Having previously written two major books, Peace without Victory for the Allies 1918-1932 and How Hitler came to Power, Sara Moore offers some valuable insights into Germany as an emerging superpower through drawing comparisons with German power in the 1930s.

A reassessment of how Germany’s deflationary policies contributed to the Great Depression in the 1930s and to her rise to power is overdue. When in 1930 Heinrich Brüning became Chancellor of Germany he told his friends in the unions that his chief aim was to liberate Germany from paying war reparations and foreign debt. He felt that if he diverted all Germany’s efforts into exports it would weaken the ability of America and the Allies to force Germany to pay her IOUs if she chose not to. The German unions therefore agreed to Brüning reducing wages, raising taxes and diverting all industrial activity into exports so as to bring pressure on the Western powers, not realising to what extent this would mean misery unemployment and a diminution of power for the workers. Brüning’s initiative was successful. Millions of people abroad were fooled into believing that Germany herself was really poor not just her hapless citizens, even though Germany was the greatest exporter in the world, with a mountain of cash in the bank.

Seventy years after the Treaty of Versailles consensus has at last been reached that the legend of the ‘vindictive’ Treaty was a fable. Yet historians have hesitated to draw new conclusions about the Great Depression, namely if German politicians escape censure for their actions in the twentieth Century will they be tempted to use deflation for political purposes in the twenty-first Century? It is true that modern Germany is a very different nation from the 1930s. She is a model of democracy and a pillar of the international community. Yet this must not stop us from voicing our alarm if we see parallels with the Great Depression. The world economy is huge compared to the 1930s but if Germay imposes a deflationary policy on Europe it can have an effect worldwide because the European Union comprises nearly 500 million people with money to save or spend.

The European Central Bank (ECB) is located in Frankfurt and modelled on the German Bundesbank. When the euro was first introduced interest rates were kept at 2 per cent, causing a slump in the value of the euro and a mass exodus of surplus funds. However since 2005 European interest rates have risen 8 times, causing the euro to rise over 50 per cent against the dollar by 2007, both because of the dollar’s weakness and to the rise in Europe’s interest rates.

Foreigners’ faith in the euro rests primarily with Germany. Other euroland countries economies are not so strong. Indeed Germany’s European neighbours have suddenly discovered that Germany effectively imposed a ‘wage freeze’ on its workers after the adoption of the euro in 1999, clawing back 40 per cent in labour competitiveness against Italy, 30 per cent against Spain and 20 per cent against France by 2007. Britain’s bankers shed few tears over France and Italy when they complained of the ECB interest rate rises making their businesses uncompetitive, or even Spain, hit by ‘an ECB-created property bubble.’ Britain’s pound was strong in the spring of 2007. It had moved ‘tightly with the euro’ for the last three years but as it always paid a little more in interest than the euro many European countries held their balances in pounds. However, in July 2007 the Bank of England decided, in view of Britain’s rising inflation, that it would raise British interest rates too, one month after the ECB. Unfortunately the combination of the American sub-prime crisis, an over-leveraged home market and the final European interest rate rise, was too much to bear – the mortgage lender Northern Rock cracked and Britain itself suddenly seemed fragile too.

In a way one could say that the present credit crisis is the delayed result of the euro’s arrival. Germany was the strongest country in euroland at its inception but outsiders worried that she was still nursing a hangover from her reunification party in 1990. She was allowed to breach EU rules that stipulated that annual government deficits must not exceed 3 per cent of GDP and the ECB also promised to keep European interest rates at 2 per cent to help the German economy. This encouraged the world’s spare cash to avoid the euro and seek higher returns in the US. The Asian economies accumulated vast sums from exports and piled them into dollars. So the bankers had the bright idea of lending money to the underprivileged so they too could share in the American dream. Instead of living in dirty dope-addicted neighbourhoods they moved into detached houses, with gardens and driveways. The trouble was that the sub-prime mortgages started with low interest rates, which soon became higher. Money began to ebb away from the US attracted by rising interest rates in Europe. In 2008 the sub-prime mortgage crisis threatens to be one of the largest losses of American wealth ever seen, wiping out a generation of home wealth building.

Despite Germany’s impressive export performance in 1930/31 most people believed her protestations of poverty in the Great Depression because of the misery and unemployment of the German people. When the euro was introduced in 1999 the German economy’s health was also in question. Yet in 2003 Katinka Barysch of the Centre for European Reform wrote an article called ‘Germany – the sick man of Europe?’ which asserted that Germany with its flourishing high-tech sector was not as infirm as many made out. Once more the world’s largest exporter she was also the principal trading partner for most Eastern European countries joining the EU.

Katinka Barysch declared that what distinguished Germany – ‘from most of its peers’ – was the weakness of domestic demand. Indeed after the arrival of the euro German workers suffered years of stagnant or declining wages. Then the German government, in an admittedly pale comparison with 1930, decided to cut corporation tax and give other advantages to industry, and to raise VAT, bringing pain to the workers, in order to pay for it. Naturally, in January 2007, the German unions asked for more money to compensate them for the increase in taxes. Yet after wage increases of 4.1 per cent were agreed with Germany’s most powerful union I G Metall, the head of the German Bundesbank Axel Weber declared that wage inflation was getting out of control, there was a growth in the money supply, and the ECB needed to raise interest rates to curb it. On 18 May 2007, France’s bank chief, Christian Noyer, flatly contradicted Weber’s comments on inflation. Yet euroland interest rates were still raised to 4 per cent – with the expectation of more – causing money to pour out of the dollar into the euro and an escalation of the American sub-prime crisis. The ECB has since flooded markets with short-term money but despite the rules being bent when the euro was first introduced to aid the German economy, Bundesbank chief Axel Weber and ECB chief economist Jurgen Stark have remained deaf to pleas, which would really help the world in 2008, to bend the rules and allow ECB interest rates to fall.

If one is looking at pre-war parallels one could chart the ebb and flow of money across the Atlantic Ocean. In the late 1920s because of her strident propaganda Germany was viewed as poor and less guilty of the war in 1914, but modern historians and economists now believe her to have been primarily responsible for the Great War and by 1928 more powerful than in 1914. European money, including an unspecified amount of German cash, flowed into Wall Street in 1928/29. At the end of April 1929, with a new deal beckoning over the payment of war reparations, Germany put her interest rates up by a full 1 per cent to 7 per cent, prompting interest rate rises in Austria, Poland and Hungary. From June 1929 Germany was reported purchasing substantial quantities of gold, an alarmed France following one month later. Germany and France’s gold purchases were so large that they eventually prompted expectations of a rise in the British bank rate as all the major countries were on the Gold Standard. Money became tight and in that environment financial scandals happen. Clarence Hatry’s fraudulent empire collapsed. Soon afterwards Wall Street crashed. In essence the Wall Street crash was a political event, caused by worries whether German war reparations and debt would ever get repaid, but tight money market conditions also helped. In 2007 money in Britain and the US also suddenly became scarce. One hopes that the final parallel with the Great Depression – a stock market crash – is averted.

In 1930 Brüning had a vision of what he wished to achieve through deflation, initially to rid Germany of reparations and debt, but also to achieve a measure of re-armament and Germany’s return to what he termed a Presidential regime. No doubt he visualised the country being led by a former army officer like himself or maybe a member of the former royal family. But misery embitters people. Hitler became dictator instead.

Germany’s deflation so far is only a faint shadow of her deflation in the 1930s but we can surmise that she has aspirations. In 1994 President Clinton prophesied that Germany would be Europe’s future leader. In the Middle Ages she had been leader of the Holy Roman Empire, which encompassed much of Europe. Later, before the First World War, the Pan German League aimed at creating an empire of all the Germanic peoples under Prussian leadership, which would include all the nations in the Austro-Hungarian Empire, also Switzerland, Holland and Belgium and Romania because of her strategic position at the mouth of the Danube. The empire would be bound together first by a customs union, which would prepare the way for the creation of community-wide legal and political institutions. Eventually a Nationalstaat would come into being ‘impelled by the logic of ethnic solidarity, economic pressure, and should it prove necessary, military force’.

In the First and Second World Wars Germany became Europe’s master by driving tanks into Europe’s cities. However after the Second World War she turned into a very different country, a bastion of democracy. Later the European Union evolved but it was not viewed as Germany’s empire, either within Germany or in the rest of Europe. Although France and Germany were original members, the EU is formally run by the Council of Ministers, the European Parliament and by bureaucrats in Brussels, rather than by a single state. Democracy is enshrined in the EU and the voice of each tiny country carries weight. Yet it is becoming increasingly clear that it has a dominant Franco-German axis and that Germany is the principal paymaster. So the old adage – he who pays the piper calls the tune – may eventually be appropriate even in the European Union.

So far Germany has behaved with admirable restraint but she is beginning to flex her muscles. Her huge export surpluses reputedly pay for the deficits of Ireland Greece, Italy, Spain and even France, while her own people scrimp and save. At Nice, in 2001, her call for greater weighting in the Council in view of her greater population, was opposed by France, who insisted that the symbolic parity between the two nations be maintained; then Germany hoped to secure more power and influence through the Constitution – but French and Dutch voters turned it down. However when Germany took over the Presidency of the European Union her Chancellor, Angela Merkel, declared that the time of reflection about a new form of government was over. By March 2007 the Berlin Declaration was adopted which declared the intention of all member states to have ratified a new Treaty for the government of the enlarged European Union by the 2009 elections. Beyond the Treaty, Germany, who stayed firmly in the driving seat during the discussions leading up to the Lisbon Treaty, is now alleged to have ambitions to create a superpower in Europe, with military power and control over taxation. One worries that if things do not go her way she could revert to her old idea of a Germanic empire, which would divide Europe and fragment nations.

One also frets about the future economic outlook of the European Union. A German historian recently alleged that in an economic sense the ‘Second World War amounted to a gigantic struggle between two diametrically opposed views on how to organise the future world market: Closed Blocs vs: the Open Door’. Lately talk of ‘community preference’ has mostly been blamed on the French. Yet few people know that Germany’s predatory economic policy beggared the world in the early 1930s and led to military blocs and war.

We live in changing times with the rise of India, China, Japan and the Far East and the relative decline of the world’s greatest super power, America. Germany has been a pillar of the international community since the war. With the help of the European Union and its most powerful provider of funds, Germany, the countries of the former Soviet Union in Eastern Europe are becoming richer, democratic and self-confident. Germany has a right to have an important say in the ECB to ensure that her money is well spent. Yet we live in a global economy. Power must be used with care. We must not underestimate Germany’s strength because of her citizens’ poverty or unemployment. Her deflation, and push for the ECB to adopt a high interest rate policy, besides affecting Britain and America, will slow growth for the whole of the European Union and create problems for the weakest states, whilst strengthening her relative position. How Germany will use this position is of fundamental interest and the parallels up to the present time with the 1930s experience raises cause for concern.