The ECB thinks it is learning the lessons of 1923, but it's not

It might be learning from 1973 — but those lessons don't apply anymore.

When editors of Bild, Germany’s best-selling tabloid newspaper, arrived at the European Central Bank in March 2012 to grill its president about the eurozone crisis, they brought with them an unusual gift. It was a Prussian military helmet to remind Mario Draghi that back in 2010 the tabloid had deemed him the most "Germanic" of candidates for the ECB’s top slot.

Of course, such editorial approval quickly disappeared after Draghi committed the ECB to buying unlimited quantities of eurozone government bonds amid efforts to do “whatever it takes” to solve the single currency’s crisis. But nevertheless the brief encounter revealed the extent of Germany’s cultural influence over Europe’s monetary guardian. Germans, it is often said, make for better central bankers: prudent and cautious, they like to take away the punch bowl just as the party gets going.

Today we often read in news media of the German psychological "aversion" to inflationary policies. This antipathy has often been attributed by politicians, bankers and journalists to the traumatic events of 1923 when Germany succumbed to the full horrors of hyperinflation. Wheelbarrows full of paper money. Children building small fortresses on the pavement with thick wads of bank notes. We have all seen the photos.

But this was an event that occurred almost ninety years ago; few, if any, Germans today have living memory of it. Moreover, other European countries, such as Hungary and Austria, underwent similar inflationary excess during the 20th century and fail to hold price stability in the same regard.

A national economic mythology surrounds inflation in Germany, and it is one that is having a disruptive impact on the eurozone crisis. With every decision the ECB makes, Draghi has to factor in the expected response of the hawkish Germans. But why has one historical event etched itself upon German popular consciousness, whereas an episode just as devastating, such as mass unemployment, has not? After all, the Weimar Republic in 1920s Germany had to contend with joblessness and ever-lengthening dole queues.

Mass unemployment, like the hyperinflation, was a major reason why the German electorate voted in droves for extreme left- and right-wing parties. Yet the memory of rampant redundancy faded in the post-war era as high rates of economic growth allowed West Germans to enjoy unprecedented job opportunities.

Why then the special attention devoted to hyperinflation? The answer lies in the virtue of monetary mythology. For all the national trauma caused by the events in 1923, the memory of hyperinflation has proved over the decades a very convenient tool for managing price expectations and building a strong belief in the post-war West German central bank.

The story of 1923 has been lapped up by the news media in recent years. “For the Bundesbank, it had always been taboo to finance the state by purchasing its sovereign bonds,” argued Der Spiegel in late 2011. “Behind this belief was the terrifying example of its predecessor, the Reichsbank, which had printed money with abandon in the 1920s in order to support the budget of the Weimar Republic. The result was a hyperinflation that has become deeply entrenched in the collective memory of Germans.”

Similarly, The Economist declared in 2010 that, “Germany’s interwar experience with hyperinflation famously created a political climate amenable to the rise of Adolph Hitler and generated sufficient national trauma that the German central bank (and its descendent, the ECB) has ever since focused first, second and last on keeping inflation well in check.”

Indeed, when asked by The Guardian in late 2011 why the Berlin government was so reluctant to allow the ECB to become last lender of resort for eurozone member states, Hans-Werner Sinn, president of the influential Munich-based Ifo Institute for Economic Research replied, “Because it leads to inflation. We know this from our own history. It’s what Germany did until 1923.”

Quotes like those above litter media coverage of German monetary and foreign policy. But to a large extent they merely echo history lessons that were skilfully articulated by German policymakers in the post-war era.

The importance of being Ernst

A central bank’s power is derived from its credibility with the markets which, in turn, are influenced as much by psychological factors as underlying economic fundamentals. Prior to the introduction of the euro currency, the Bundesbank was able to carefully construct an image of prudence to keep the deutschmark stable - primarily by means of strong policy initiatives and a clear communications strategy.

Officials in Frankfurt used the example of hyperinflation in order to reassure markets that never again would a German state descend into the realm of monetary madness. It was a simple and effective narrative: 1923 was an event that evaporated people’s savings, destroyed the political support of moderate parties, and helped pave the way toward fascist dictatorship. An irresponsible monetary policy, the Bundesbank argued, was unimaginable in a post-war German state.

Just look at the 1970s, for instance - a decade when the old truths of monetary policy no longer seemed to apply. The Phillips curve, an erstwhile economic ‘law’ that hitherto demonstrated the inverse relationship between inflation and unemployment rates, dissipated amid economic turmoil. Suddenly governments had to contend with both problems at the same time, a new phenomenon dubbed ‘stagflation’.

Moreover, the Bretton Woods system collapsed in 1971. European states no longer had the benefit of fixing their currency exchange rates to the American greenback to hold inflation expectations steady. The international rules had changed, and all major economies soon opted for a system of floating exchange rates.

Central bankers in Europe had to fight to keep the trust of international markets in the midst of energy price spikes and economic volatility. In Germany, then, potential inflationary dangers took on new prominence during the 1970s, appearing in Bundesbank presidential speeches, policy documents and national debates. Central bank press statements and conferences allowed officials to complement and reinforce the institution’s hard-line policy actions with historical justification.

The strategy worked. In 1974 most industrialised economies had double digit inflation rates. By contrast West Germany had an inflation rate of 7 per cent, which steadily declined thereafter until 1979. Fifty years after wheelbarrows full of paper money, the deutschmark had become the centre of gravity in the European currency market.

The useful lessons of 1923 tapped into the Germans’ imagination. Cultural memory, it seems, has its own form of economics. When asked about his institution’s influence and power, Karl Otto Pöhl, the central bank’s president during the 1980s, quoted Stalin’s ironic remark, “How many divisions has the Pope?” Other European central bankers could only look with envy at the Bundesbank’s international prestige.

Don’t mention the euro

But what proved a useful instrument for the West German central bank in the decades following the Second World War, now acts as a hindrance to an effective solution to the eurozone crisis. The example of hyperinflation continues to be wielded by German policymakers as a means of influencing the parameters of European monetary debate.

News media still happily recount the narrative, almost without thinking. The Financial Times warned last October, “[t]he eurozone sovereign debt crisis has already generated a lot of angst in Germany – fears about hyperinflation wiping out savings, the ballooning cost of bailouts and the nagging doubt that life was more certain with the deutschmark in one’s pocket.”

Statements like these only serve to reinforce the German case for European austerity; for the impression is given that Germans can’t help but be psychologically opposed to inflationary policies.

And the ECB, for its part, is in a difficult position. The institution owes an enormous intellectual debt to the hawkish Bundesbank: its statutes are modelled on the Bundesbank’s, and it is no accident that the ECB’s headquarters can be found in Frankfurt – a symbolic act that stresses its link with Germany.

But this debt is now becoming an actual burden. The arena of central banking has changed dramatically since the financial crisis. Almost by necessity, monetary policy has become increasingly blurred with that of fiscal in order to counter the fallout stemming from market turmoil.

Indeed, many business commentators have accused the ECB of being too focused on fighting inflation and not enough on stimulating the floundering European economy. It is an accusation that Draghi is all too aware of. The Italian, however, is constrained by the tall shadow of the Bundesbank.

During the Bild interview, for instance, his interrogators put forward the following question: “For the Germans, the head of a central bank must be strictly against inflation, independent of politics and for a strong euro. In this sense, how German are you?” There was a pause. Draghi had to choose his words carefully.

“These are indeed German virtues,” the Italian responded. “Germany is a role model [for the ECB] … In the 20th century the Germans had terrible experiences with inflation. It destroys value and makes economic planning impossible. More still, it can literally destroy the society of a country.”

But the Bundesbank’s opposition to government bond purchases has substantially delayed the ECB’s eventual course of action. It was only last September, despite much German protest, that the ECB president adopted an open-ended commitment to buy up periphery short-term sovereign bonds – arguably seen as a core tenet of any effective solution to the eurozone’s woes.

An event that occurred nine decades ago continues to shape the contours of monetary debate in Europe today. But Germany’s national priorities do not necessarily make for good supranational ones.

When the editors of Bild reminded the ECB president that the tabloid cheekily portrayed him wearing a Pickelhaube on its front-page in 2010, Draghi shared his thoughts on the image: “I quite liked it actually. The Prussian is a good symbol for the most important job of the ECB: to maintain price stability and protect European savers.” It is unlikely, however, that the Prussian helmet will point Draghi in the right direction.

The ECB’s credibility now rests on an effective response to the eurozone crisis. The central bank’s president is quite right when he argues that inflation “destroys value and makes economic planning impossible.” But Draghi now has an opportunity to break from the past.

Were the ECB’s monetary chief to spearhead a successful solution to the euro’s troubles – one that is likely to depart significantly from Bundesbank orthodoxy – he may well go on to form a powerful, new narrative that will in turn shape the parameters of monetary debate in Europe.

Mario Draghi. Photograph: Getty Images

Simon Mee is a freelance journalist currently undertaking doctoral research in German economic history at Oxford University.

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Meet Anne Marie Waters - the Ukip politician too extreme for Nigel Farage

In January 2016, Waters launched Pegida UK with former EDL frontman Steven Yaxley-Lennon (aka Tommy Robinson). 

There are few people in British political life who can be attacked from the left by Nigel Farage. Yet that is where Anne Marie Waters has found herself. And by the end of September she could well be the new leader of Ukip, a party almost synonymous with its beer-swilling, chain-smoking former leader.

Waters’s political journey is a curious one. She started out on the political left, but like Oswald Mosley before her, has since veered dramatically to the right. That, however, is where the similarities end. Waters is Irish, agnostic, a lesbian and a self-proclaimed feminist.

But it is her politics – rather than who she is – that have caused a stir among Ukip’s old guard. Former leader Paul Nuttall has said that her views make him “uncomfortable” while Farage has claimed Ukip is “finished” if, under her leadership, it becomes an anti-Islam party.

In her rhetoric, Waters echoes groups such as the English Defence League (EDL) and Britain First. She has called Islam “evil” and her leadership manifesto claims that the religion has turned Britain into a “fearful and censorious society”. Waters wants the banning of the burqa, the closure of all sharia councils and a temporary freeze on all immigration.

She started life in Dublin before moving to Germany in her teens to work as an au pair. Waters also lived in the Netherlands before returning to Britain to study journalism at Nottingham Trent University, graduating in 2003. She subsequently gained a second degree in law. It was then, she says, that she first learnt about Islam, which she claims treats women “like absolute dirt”. Now 39, Waters is a full-time campaigner who lives in Essex with her two dogs and her partner who is an accountant.

Waters’s first spell of serious activism was with the campaign group One Law for All, a secularist organisation fronted by the Iranian feminist and human rights activist Maryam Namazie. Waters resigned in November 2013 after four years with the organisation. According to Namazie, Waters left due to political disagreements over whether the group should collaborate with members of far-right groups.

In April 2014, Waters founded Sharia Watch UK and, in January 2016, she launched Pegida UK with former EDL frontman Steven Yaxley-Lennon (aka Tommy Robinson). The group was established as a British chapter of the German-based organisation and was set up to counter what it called the “Islamisation of our countries”. By the summer of 2016, it had petered out.

Waters twice stood unsuccessfully to become a Labour parliamentary candidate. Today, she says she could not back Labour due to its “betrayal of women” and “betrayal of the country” over Islam. After joining Ukip in 2014, she first ran for political office in the Lambeth council election, where she finished in ninth place. At the 2015 general election, Waters stood as the party’s candidate in Lewisham East, finishing third with 9.1 per cent of the vote. She was chosen to stand again in the 2016 London Assembly elections but was deselected after her role in Pegida UK became public. Waters was also prevented from standing in Lewisham East at the 2017 general election after Ukip’s then-leader Nuttall publicly intervened.

The current favourite of the 11 candidates standing to succeed Nuttall is deputy leader Peter Whittle, with Waters in second. Some had hoped the party’s top brass would ban her from standing but last week its national executive approved her campaign.

Due to an expected low turnout, the leadership contest is unpredictable. Last November, Nuttall was elected with just 9,622 votes. More than 1,000 new members reportedly joined Ukip in a two-week period earlier this year, prompting fears of far-right entryism.

Mike Hookem MEP has resigned as Ukip’s deputy whip over Waters’ candidacy, saying he would not “turn a blind eye” to extremism. By contrast, chief whip, MEP Stuart Agnew, is a supporter and has likened her to Joan of Arc. Waters is also working closely on her campaign with Jack Buckby, a former BNP activist and one of the few candidates to run against Labour in the by-election for Jo Cox’s former seat of Batley and Spen. Robinson is another backer.

Peculiarly for someone running to be the leader of a party, Waters does not appear to relish public attention. “I’m not a limelight person,” she recently told the Times. “I don’t like being phoned all the time.”

The journalist Jamie Bartlett, who was invited to the initial launch of Pegida UK in Luton in 2015, said of Waters: “She failed to remember the date of the demo. Her head lolled, her words were slurred, and she appeared to almost fall asleep while Tommy [Robinson] was speaking. After 10 minutes it all ground to an uneasy halt.”

In an age when authenticity is everything, it would be a mistake to underestimate yet another unconventional politician. But perhaps British Muslims shouldn’t panic about Anne Marie Waters just yet.

James Bloodworth is editor of Left Foot Forward

This article first appeared in the 17 August 2017 issue of the New Statesman, Trump goes nuclear