Germany’s postwar economic miracle is now a distant memory. Chancellor Gerhard Schroeder won his second term of office on the back of his trenchant opposition to a US-led military attack on Iraq. Had that political platform not been available to him, it is likely he would have lost and lost badly, because under his Socialist-led government, the German economy has lurched from bad to worse.
News this week that German unemployment is approaching 12 percent deepened the mood of despair that has settled upon the country. The root of Germany’s economic woes is simple. When the going was good, Germans could afford to pay themselves high wages, high pensions and generous welfare. When the good times ended, both Schroeder and his predecessor Helmut Kohl failed to rebalance the books.
Though some limited reform has been pushed through, the major work of cutting benefits and industrial subsidies remains to be tackled. Unfortunately, as the economic situation has worsened, so has the political will to grasp the nettle.
To some extent, Germany’s economic problems are frozen by its membership of the eurozone. The steady campaign of rate cuts by the European Central Bank has so far failed to kick-start renewed growth, no more in Germany than elsewhere in the eurozone. Yet this week saw the euro closing at its highest ever rate against the US dollar. This means that eurozone exports are becoming more expensive, making it even more difficult for European businesses to export their way out of their recession.
Germany was always envisaged as the powerhouse of the new European economic order, with its dynamic new single currency. Few people could have imagined that within a few years of the euro’s introduction, Germany would be numbered with the more obviously economically unstable Portugal, as the two eurozone states in the deepest financial trouble.
Yet Germany’s modern reputation for financial conservatism and economic rectitude is not entirely deserved. As with Japan, much of Germany’s postwar recovery was funded by US money. The Germans did the work but the seed capital came from outside. The Truman presidency wisely took the view that crippling reparations, such as those imposed on Germany after World War II, would merely once again lay the foundations for yet further conflict. It was from the vindictive and crippling reparations that Hitler’s Nazis drew their greatest propaganda that Germany had been stabbed in the back by its former leaders.
There was, however, another political issue which Hitler was able to ride all the way to the German chancellorship. This was the mismanagement of the German economy. In 1928 Germany followed Austria and Hungary into an inflationary spiral the like of which had never been seen. A loaf of bread cost billions of marks, wages were paid daily because they lost their value so rapidly and note issuance in a single day totaled the entire emission for the previous year. Yet throughout this extraordinary inflation, the best financial minds in Germany chose to believe that the mark’s collapse against other currencies was caused purely by the appreciation of those other currencies. It was a refusal to recognize a problem for what it was.
Hopefully Schroeder and his government have been reading their history books.
