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.

Shazia Awan
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“I was nothing more than a tick-box exercise”: Ex-Tory candidate Shazia Awan on racism in the party

The former Conservative candidate for Leigh reveals how, as a woman from an ethnic minority background, she was singled out and made to feel unwelcome in the party.

I remember the exact moment that the Conservative party first captivated me. It was 2007. David Cameron had appointed the first Muslim woman to his shadow cabinet, in the form of Sayeeda Warsi. I thought: Here is a man promising to change the face and feel of the party – and delivering on it.

With Operation Black Vote – an organisation that fights for BME communities to have a place in British politics – by my side, I began to navigate my way through the murky world of the Conservative party. I stood as a parliamentary candidate in England, and became the first Asian woman to address a Conservative party conference in Wales.

In many ways I was protected by some senior Conservatives who took me under their wing. Looking back, I think they understood the very real, nasty side of the Conservative party and wanted to shield me.



Shazia Awan with David Cameron. All photos: Shazia Awan

But they could not always be there to protect me from the reality of it.

It has pained me to see the party that I have loved and admired since I was a teenager embark on a campaign that seems designed to divide and rule London. I never imagined that this party, under the leadership of David Cameron and Boris Johnson, would do and say things that are so fundamentally wrong, unacceptable and untrue. 

As a proud Welsh Asian woman, I have experienced racism and prejudice on many levels over the years. Sometimes the comments have been casual (“you don’t look very Welsh to me” or “yes, you were born in Wales, but where are you originally from?”). I was born in Caerphilly and raised in Cardiff. I feel nothing but Welsh and proud, and find it astonishing that this answer is not enough for some people. When pressed, I’ve told people my family are “East African Asian”, and within the Conservative party have often been met with the response: “You don’t look black.”

This is the everyday racism that, as someone from an ethnic minority, I am used to and equipped to deal with.


Shazia Awan with Margaret Thatcher.

There have been times in my life when I’ve experienced racism – sinister and ugly, divisive by design, with the sole purpose of intimidating and making one feel inferior. It was this sort of deep-rooted hostility behind the scenes at the grassroots level of the Conservative party that eventually prompted me to let my membership expire.

I realised this when I had become immune to the casual racist slurs from some white Conservative men, who I felt wanted to exert a form of ownership over me.

The Conservative party has a detailed selection process, which involves writing essays, interviews and in-tray exercises. I was thrilled to have been approved onto the list of prospective candidates for the party. I applied and was called for an interview at a Welsh association.

But I didn’t get far. I suspect this was less about my ability, and more because I looked different.

How else could one explain why a Asian woman was asked by a panel of old white men: “What are your views on the rule of the British Raj?”

This vile question was not the end of my ordeal with the Conservatives. I have also been asked: “Why does the National Black Police Association exist? Do you people really need it?”

I’ve yet to figure out how the rule of the British Raj has any bearing on the Conservative party's selection process, or indeed why my views on non-white police officers are relevant to the process of selecting a parliamentary candidate.

Looking back, I believe the questions were designed to rile me, to upset me, to make me feel uncomfortable and unwelcome and to exert a false sense of white superiority over me.


Shazia Awan with William Hague.

That experience toughened me up and opened my idealistic eyes to the harsh realities of politics in the UK if you are from an ethnic minority and/or a woman. So much so that, when the British National Party plastered photos of me from a Conservative party trip to Bosnia on its website homepage, saying Conservative party push forward black female candidate, I took it in my stride.

What I saw in the Tory party had taken away my ability to even feel affected by the destructive and racist rhetoric of a group as vile as the BNP. I was labouring under the misapprehension that I was part of the Big Society that David Cameron talked of.

That casual brand of racial stereotyping from my selection interview has now bubbled up into the upper echelons of the party in 2016. We see it in the mayoral campaign against Sadiq Khan. We see it in Boris Johnson’s reference to Barack Obama as a “part-Kenyan president”.

Johnson also left me feeling disappointed and angry when he said, “In Islam and the Labour party there is a struggle going on, and in both cases Khan, whatever his real views is pandering to extremists. I don’t want him running our capital.” From this, I can only infer that Johnson does not want a British Asian Muslim man to head up City Hall.

The events in recent months have shown me that the Conservative party has not changed, is not ready for change, and ultimately deserves its “nasty party” epithet.

“Some Tories have tried to make political capital by demonising minorities instead of showing confidence in all citizens of our country,” Home Secretary Theresa May told party conference in 2002. “Some people call us the ‘nasty party’, I know it’s unfair but it’s the people out there we need to convince.”

She would have done well to recall this speech when news of the Home Office’s “Go home or face arrest” vans came out in 2013.


Shazia Awan with a Tory Vote for Change slogan poster.

Many decent Tories have reached out to tell me they are in utter dismay at the current state of their party and will be letting their membership lapse. I think the Conservative party has lost all touch with public opinion, and this will be its downfall.

The way that senior Tories have tried to legitimise discrediting Sadiq Khan tells me that there is no place for ethnic minorities in the Conservative party. I felt I was nothing more than a tick-box exercise for them: a young, articulate Asian, Muslim woman. One senior Tory even asked me: “It would be too good if you batted for the other team, wouldn’t it – you don’t do you?” I was baffled by this question. “No I don’t,” I said. In a very matter-of-fact tone, the reply was: “Well, then you’d really tick every box for us.”

The biggest failing I see is from the very man who first inspired me to want to become involved in the political process, the man who made me believe the Conservative party was a place for everyone: our Prime Minister, David Cameron. He has allowed this hate-filled campaign to flourish. And when he spoke of Khan as if he were an extremist sympathiser in the Commons, it made it clear to me that they are fighting Sadiq Khan for being Muslim first and Labour second.

Britain is not a country where we want to import the baseless and scaremongering politics we see from Donald Trump. Our Prime Minister has forgotten his own messaging about the community cohesion that once seemed to be his priority.

I cast my mind back to 1964 in the West Midlands constituency of Smethwick, which saw a Conservative politician Peter Griffiths elected on the slogan: “If you want a n****r for a neighbour, vote Labour.” A bit like Goldsmith, Griffiths arrogantly refused to acknowledge that his campaign could be harmful.

But there is one startling difference between 1964 Smethwick and 2016 London. In the Commons, the prime minister at the time, Harold Wilson, called on Griffiths to be disowned. In contrast, Cameron has used the chamber to enthusiastically back Goldsmith’s campaign.


Shazia Awan with Lord Ashcroft.

The Tory smears are no longer coming from the grassroots, as I experienced them back when I was first getting into politics. They are coming from the very top of the Conservative party.

From Enoch Powell to Boris Johnson to Zac Goldsmith, I feel the Conservative party has exploited racism rather than opposed it. I can validate that from my own experience of being singled out because of my background. I feel that David Cameron should issue an apology to the British Asian community for the disrespectful rhetoric of this destructive mayoral campaign.

I am not afraid to speak out against injustice. That’s why I got involved in the political process. I will speak out against injustice even if that means speaking out against a party I have supported my whole life. So, as a lifelong Conservative voter, I urge all Londoners and my fellow Tories to show the feeble and unprincipled Goldsmith that such vitriolic politics are not welcome in London, and will not be tolerated. Vote for Sadiq Khan to be a mayor for all Londoners.

> Read Shazia's condemnation of Zac Goldsmith's mayoral campaign

> Read Anoosh Chakelian's feature on the racial politics of Zac Goldsmith's mayoral campaign

Shazia Awan runs SME Chicabel. She was named one of Management Today’s 35 Under 35 and is an alumni of the American Embassy and Department of States's International Leaders programme. She is also a PR consultant with 15 years' experience of working on national brand campaigns and was the first Asian woman to address a Welsh Tory party conference. You can follow her on Twitter @shaziaawan.