Heiner Flassbeck – The German Problem

The world has a problem with Germany. In Germany, however, people are completely unwilling to admit it. Germany has become a prime example of collective cognitive dissonance.

Heiner Flassbeck is an economist, as well as publisher and editor of “Makroskop” and “flassbeck economics international

Originally posted in German at Makroskop

Translated and edited by BRAVE NEW EUROPE

The Germans, on the whole, would like to be good Europeans. The problem is that they would like to be the best Europeans. But the two don’t go together: You can’t be a good European and the best European at the same time. It’s the same story at the global level. Germans would like to be equal citizens of the world, open, tolerant and eloquent. But, even more, they would like to be the global role model: climate saver, wind catcher, sun worshipper, stability anchor and the most powerful trading nation in the world – all at the same time. German-German monetary union was also a complete success according to this measure. Anyone who sees things differently in East Germany has not understood what the West Germans did to liberate them.

Although it is obvious that aspiration and reality are often wide apart, people in Germany are convinced that this must be the case, because otherwise there is simply no way forward. The Europeans must realise that we only have their best interests at heart. The world must realise that we are the superior engineers. And the Ossis (East Germans) must understand that our market economy is the superior system. One should use the day of German reunification (October 3rd) to give some thought to the (West) German way of thinking.

Both phoenix and pedagogue

The great disaster began with European Monetary Union and the new century. Germany, already obsessed for years with the idea of having to prove itself in the world with superior competitiveness and superb conditions for global investors, was reluctant to integrate into the European Monetary Union, but quickly recognized the enormous potential that this Union offered. The “best low-wage sector in the world” that a red-green coalition had created – combined with enormous political pressure on the trade unions – finally achieved the success in a single-currency system that Germany under Chancellor Helmut Kohl had sought in vain for 16 years with similar efforts.

And indeed, like a phoenix from the ashes, the “sick man of Europe” rose up and showed the others how modern economic policy works. The euro was weak, but Germany became stronger and stronger. As if proof were needed, the global financial crisis and the euro crisis came, and the phoenix became the German eagle which – via Greece, Spain and Portugal – taught the whole world a lesson in proper economic and financial policy.

Finally! The point in German history had been reached where the united German people could shake off the burdens of the past and rise to become a great European power. Germany was again a force to be reckoned with. Germany was the most important donor, the most important anchor of stability, the most important trading partner, and by far the most important voice when it came to laying down the law about those who had sinned, who had enriched themselves on credit and who now had to be called to account for their mistakes.

But the times they are a-changing. The success of the European operation under German leadership was meagre. The only one who profited uninterruptedly was the surgeon himself. Greece sank into misery, and for over ten years the rest of Europe failed to free itself from the shackles imposed on it by the German spirit and the letter of the Treaties dictated by Germany. More and more voices were raised asking how it could be that, in a union of equals, one country profited permanently while the others went on languishing. How is it, the question was asked, that German superiority hasn’t turned out to be a temporary phenomenon? How can it be that others must do the same as Germany when it is obvious that not every country can do the same?

Trump as gamechanger

Then Trump came along. He said openly what many thought, but didn‘t dare to say: “Germany is bad, very bad”. Paul Krugman, in rare agreement with the American president, recently spoke about the world having a Germany problem. In Italy a government was elected in 2018 which was immediately accused by the German media of open hostility towards Germany – although it only put into words what many throughout Europe had meanwhile understood. Even the International Monetary Fund, which had explicitly welcomed Germany’s presence as a partner in the Troika, because of its strict austerity “dictatorship“ over Europe, began to understand that the Greek operation had been a complete failure.

More and more people in the world and in Europe distanced themselves from this kind of policy, especially since it became increasingly clear in international discussions that Germany’s insistence on austerity and freedom from debt was not the expression of a superior model, but merely the result of mercantilism and a beggar-thy-neighbour mentality, which cannot be imitated by any country or group of countries of the same size and has had fatal consequences for international trade and the euro. But the stronger the international criticism, the more incomprehensible is the attitude on home soil. In Germany, the majority of the “political-media complex” still insists on the position that everything has always been done correctly and that any failure can be explained by the stubbornness or intransigence of the other side.

The ECB as an object of collective hatred

But the thorn in Germany’s side is the ECB. Located in the heart of Germany, built on the model of the Deutsche Bundesbank, this institution and its Italian president have had the audacity to do just about everything since 2012 that runs counter to the German concept of a tight money policy at all times. What? A free hand for Draghi?

There has probably never been an international institution before the ECB that has got through so many high-ranking Germans in such a short time. One after the other German appointees have chucked in the towel, most recently Sabine Lautenschläger, the only German on the current Executive Board. Whatever the motives of each individual may have been to leave the ECB, the mere fact that after the crisis no one from the country, which is infallible in its own view in matters of money and monetary policy, has so far survived his full term of office there makes the European Central Bank the target of furious attacks and ever new complaints before the Federal Constitutional Court.

You can only explain this attitude towards the ECB in terms of intellectual isolation in Germany and perhaps a lack of language skills. Even in Germany one might have been able to see that a Europe without success in reducing unemployment, without success in reducing public debt, with an increasing deflationary tendency and with a blatant weakness in growth is raising more and more critical questions. It was clear that such a diagnosis would entail analyses in Europe itself and in the rest of the world that would not overlook Germany’s role at the party. And it is also to be expected that there are few people and politicians in the rest of the world who, in the field of economics, are so influenced by questions of faith as those in Germany and in the entire German-speaking world (including, in this particular case, the Dutch).

The ECB’s current interest-rate policy, as Friederike Spiecker shows very vividly and clearly in a series of articles, is the result of the failure of economic and financial policy (at European level and in Germany) since the beginning of EMU. It is because Germany believed it could succeed in the short and long term by exerting political pressure on its own wages, that the deflationary bias emerged right at the beginning of EMU. Because Germany never admitted, to itself or anyone else, that it had done anything wrong, insisting that its European partners must emulate the German solution – the deflationary bias strengthened in the second decade. Because Germany was already completely inflexible about fiscal policy in the 1990s and later insisted on a policy of austerity, the last policy area that could have offered a way out was also blocked in EMU.

Old dogmas and new insights

But all this is being systematically suppressed. Instead of dealing with their own mistakes, the German public are heaping aggressive and really stupid abuse on the ECB and its President, while the politicians responsible keep themselves at a safe distance. In Germany and Austria, and this is particularly true of the economists working academically in both countries, it has never been acknowledged how the international scientific discussion on the role of monetary policy has fundamentally changed since the end of monetarism (Michael Woodford’s book “Interest and Prices” and the ensuing discussion have certainly played a major role).

However, the ECB could not ignore this because the German monetarist approach (which Otmar Issing also tried to anchor in the ECB with the so-called two-pillar theory) had never provided a manageable basis for monetary policy (not even in times when the Deutsche Bundesbank was directly responsible for monetary policy in Germany and parts of Europe after the end of Bretton Woods). The ECB is naturally much more closely involved in the international debate on monetary policy than can possibly be imagined in Germany and its “financial capital” Frankfurt.

Unlike the Deutsche Bundesbank, the ECB – and this is even more important – was from the outset responsible for a large, relatively closed economic area in which it was pointless from the outset to rely on mercantilism à la Schröder and Merkel. This is precisely one of the points that, although obvious, have never been understood in Germany. In the dominant German economic canon, which is closely based on the neoclassical equilibrium theory, there is simply no way to successfully develop an economy on its own. One “needs” foreign countries or other exogenous impulses to stimulate investment activity. Europe was and is lost with such an approach.

The debt and the generations

The Germans are firmly convinced that they are a clever people. Are there not enough German inventors, scientists and philosophers to prove it? However, the question is why such a clever people has for decades not been able to grasp some of the simplest economic relationships.

Another German politician, who many citizens consider to be clever, has just shown that he cannot grasp a simple economic relationship. Peter Altmaier, the German Federal Minister of Economics, said the following two sentences in a talk show last week (his remarks in German here):

“The debt brake is right… the black zero is an achievement… I don’t want to incur debts at the expense of future generations”.

Again and again, from Gerhard Schröder to Angela Merkel and Wolfgang Schäuble, this mantra is uttered, although it is clearly wrong. If the state issues bonds, i.e. takes on additional debt, these bonds are bought by a bank or a German saver and consequently increase the buyer’s claims. For society – young and old – new debts are incurred by the state (by issuing state bonds) and bond buyers have new claims on the state in the form of securities that run for ten, thirty or even more years. Both the claims and the liabilities are inherited, and consequently the overall asset position of the younger generation remains completely unchanged.

It is not even necessary to go into the connection between saving and investing – which is not difficult, but somewhat more complex – to show that this sentence about the burden on the generations is wrong. And yet in the 21st century the Federal Minister of Economics can get away with saying such things without having to resign the next day, for showing the broader public that he hasn’t the faintest idea about the subject he is responsible for.

Mental isolation is the way to economic-conservatism

In Austria, too, a young man has just won the election who has little else to say but that no new debts will be incurred under his government. “We’re putting an end to debt politics“, you can also say openly in Austria, without the press or the scientific community asking the simple question who should then incur the debt that is needed in every economy in which large groups, such as private households and companies, are trying to save money.

How is it possible that economic issues are discussed intellectually at a level that, in any other area, would be seen as a sign of retarded development? Is it really just the simple fact that conservative governments are not criticised by the conservative press and conservative economists for ideological reasons? Is it because indoctrination with the ideology of the Swabian housewife begins at childhood, continues through school and university, and for most people never comes to an end?

I have been following the economic debate for several decades now. I too don‘t have a truly satisfactory answer to these questions. It only seems clear to me that the German-speaking countries in particular still suffer from the fact that the great controversies surrounding the declaration of the Great Depression of the 1930s simply aren’t debated because of the Third Reich and the Second World War. In the Anglo-Saxon countries, this question – like no other question before and after – shaped the economic debate for two decades. There, the paradigm of the market system functioning at all times was so shaken that no one could operate an economy without dealing with the potential instability of the market system. In Germany and Austria these two decades of critical economic research simply never happened.

In Germany in the 1950s, people were satisfied with the fact that after the great collapse things were moving upwards and “the market economy” could be held responsible. Even at the beginning of the 1950s, when neither Bretton Woods nor Keynesianism in Germany had really been taken up or even understood (also because it was objectively not yet fully understood), the ruling economic circles agreed that Keynes’s theory was only a theory of crisis that was simply not suitable for everyday non-crisis life.

The more the fairy tale of the “German economic miracle” prevailed, the less Keynes seemed to be relevant. The only interesting pre-war story was the inflation of the early 1920s, because one could turn its end into a German heroic story. At the end of the Great Depression in the mid-1930s, for understandable reasons, no one wanted to create a heroic story in the sense of a “New Deal”. The focus on inflation was also good because after the Second World War there had been a brief flare-up of inflation, which Ludwig Erhard (as a new heroic story) had quickly brought to an end by means of the market economy and brave central bankers.

For the German economists it was therefore a good thing that after the shocks of the 1970s the neo-liberal counter-revolution began and what Germany had always known was finally “understood” by the rest of the world: everything the state does is evil, in reality the market rules and is supported by an elected government only where it is really necessary. “Economy“, as Otto Graf Lambsdorff (a former Federal Economics Minister) said, “takes place in the economy.“

The German economists were on world level again, overnight, even if they had never spiritually processed anything that had happened in between. One only had to learn a little simple mathematics and acquire some new econometric methods with which one tested the equilibrium market models in order to have an international say. Whether this knowledge was relevant for overcoming economic problems was no longer of interest to anyone.

The transfer problem, to name just one of the important examples, which was connected with the German reparations payments after the First World War and had been meticulously dealt with by Keynes, was practically unheard of in Germany. It is precisely this problem that became of paramount importance both during German unification and during the crisis of European Monetary Union. However, German economists still have nothing to do with it.

One of the great paradoxes of recent world history is that the collateral damage caused by Germany’s decades of ignorance of economic issues has so far been felt primarily in East Germany and in the southern part of the European monetary area. But, as Charles Dickens wrote: “There will be a day of reckoning sooner or later” …

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