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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Theresa May’s stage-managed election campaign keeps the public at bay

Jeremy Corbyn’s approach may be chaotic, but at least it’s more authentic.

The worst part about running an election campaign for a politician? Having to meet the general public. Those ordinary folk can be a tricky lot, with their lack of regard for being on-message, and their pesky real-life concerns.

But it looks like Theresa May has decided to avoid this inconvenience altogether during this snap general election campaign, as it turns out her visit to Leeds last night was so stage-managed that she barely had to face the public.

Accusations have been whizzing around online that at a campaign event at the Shine building in Leeds, the Prime Minister spoke to a room full of guests invited by the party, rather than local people or people who work in the building’s office space.

The Telegraph’s Chris Hope tweeted a picture of the room in which May was addressing her audience yesterday evening a little before 7pm. He pointed out that, being in Leeds, she was in “Labour territory”:

But a few locals who spied this picture online claimed that the audience did not look like who you’d expect to see congregated at Shine – a grade II-listed Victorian school that has been renovated into a community project housing office space and meeting rooms.

“Ask why she didn’t meet any of the people at the business who work in that beautiful building. Everyone there was an invite-only Tory,” tweeted Rik Kendell, a Leeds-based developer and designer who says he works in the Shine building. “She didn’t arrive until we’d all left for the day. Everyone in the building past 6pm was invite-only . . . They seemed to seek out the most clinical corner for their PR photos. Such a beautiful building to work in.”

Other tweeters also found the snapshot jarring:

Shine’s founders have pointed out that they didn’t host or invite Theresa May – rather the party hired out the space for a private event: “All visitors pay for meeting space in Shine and we do not seek out, bid for, or otherwise host any political parties,” wrote managing director Dawn O'Keefe. The guestlist was not down to Shine, but to the Tory party.

The audience consisted of journalists and around 150 Tory activists, according to the Guardian. This was instead of employees from the 16 offices housed in the building. I have asked the Conservative Party for clarification of who was in the audience and whether it was invite-only and am awaiting its response.

Jeremy Corbyn accused May of “hiding from the public”, and local Labour MP Richard Burgon commented that, “like a medieval monarch, she simply briefly relocated her travelling court of admirers to town and then moved on without so much as a nod to the people she considers to be her lowly subjects”.

But it doesn’t look like the Tories’ painstaking stage-management is a fool-proof plan. Having uniform audiences of the party faithful on the campaign trail seems to be confusing the Prime Minister somewhat. During a visit to a (rather sparsely populated) factory in Clay Cross, Derbyshire, yesterday, she appeared to forget where exactly on the campaign trail she was:

The management of Corbyn’s campaign has also resulted in gaffes – but for opposite reasons. A slightly more chaotic approach has led to him facing the wrong way, with his back to the cameras.

Corbyn’s blunder is born out of his instinct to address the crowd rather than the cameras – May’s problem is the other way round. Both, however, seem far more comfortable talking to the party faithful, even if they are venturing out of safe seat territory.

Anoosh Chakelian is senior writer at the New Statesman.

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