Germany's Angela MerkelTHOMAS PETER
Germany needs to forget about its deep-seated obsessions with inflation and make a true commitment to Europe, allowing the European Central Bank to act as a lender of last resort. Otherwise, the world will not only witness the end of the euro but might experience a collapse of international financial transactions similar to the early 1930s – with economic and political effects that nobody should want to see repeated, least of all Germany.
It's easy to blame profligate governments and consumers in Europe's South for the euro crisis: They used low interest rates to pay off public-sector employees and speculate in real estate rather than invest in productive assets to become more competitive. Much of this was made possible not only by the adoption of the common currency but also by banks that egged on governments and consumers to borrow more. Going further back, the root cause for the current crisis has been the gradual transformation of banking from a special kind of activity with responsibilities for the economy as a whole into a purely profit-making business, where everyone pursued their self-interest without regard for the broader consequences.
But now is not the time for blame. Nor is it the time for political brinksmanship. Some commentators have suggested that Germany and France are using and even fostering the crisis to create a common fiscal regime and European supervision over national budgets. European countries do need to get their finances in order and rethink the way the continent is governed – but not with a gun pointed to their heads by German Chancellor Angela Merkel and French President Nicolas Sarkozy, the rating agencies or financial markets.
There's no guarantee these agreements will be respected in the future. Suffice going back to 2003, when the pact intended to ensure stability in the euro zone by imposing strict discipline on national budgets was first suspended, then watered down at the behest of – wait for it – Germany and France.
The only way to put an immediate end to the euro crisis and gain the breathing room to make the necessary reforms is by allowing the ECB to act as a lender of last resort – to print money, if necessary, like other central banks can. This would enable the bank to prevent crippling bankruptcies of major financial institutions and even national governments and, given this more or less unlimited power, pre-empt bank runs and speculative attacks.
Germany, however, is diametrically opposed to such a solution, not because it wants to create a common fiscal regime or because it fears reckless behaviour by financial institutions or national governments, but because it's horrified by the idea of inflation, which might result from such a move. This obsession is understandable given the country's history: The traumatic experience of hyperinflation, which wiped out the savings of its middle classes after the two world wars, with ordinary people paying for the conflicts its leaders had started. Images of having to carry money in a wheelbarrow to buy bread after the First World War or using American cigarettes as "hard" currency after the Second World War are deeply engrained in Germany's collective memory.
But now is not the time for obsessions. Germany should let the ECB act as a lender of last resort to put an immediate stop to the crisis. This makes sense for three reasons.
First, it's in no way certain that inflation will result from this decision. The origin of the crisis is a lack of confidence, which would be quickly restored if the ECB were allowed to use its muscle to curb speculative attacks on European banks and countries. This doesn't mean they would be bailed out indefinitely – or actually at all. It only means they would be able to refinance themselves at sustainable interest rates, giving them time to unwind their bad debt and carry out the necessary economic and fiscal reforms.
Second, ordinary Germans need to be made aware of the benefits the common currency has brought to their country and to them personally. Germany has been the main beneficiary of the euro, whether history proves it to be a short-lived failed experiment or a triumphant global reserve currency. By combining softer and harder currencies, the euro has made the export-oriented German economy highly competitive internationally, allowing its firms to benefit from enormous demand in emerging economies. Moreover, "easy money" in other parts of Europe allowed consumers to buy German cars, companies to buy German machinery, and governments to employ German firms to build their infrastructure (the new Athens airport being a case in point). It's thanks to the euro that Germany survived the recent recession relatively unscathed.
Third, it's important to consider the alternative to an ECB-led rescue of the euro by looking back to the Great Depression. Following the stock market crash of 1929, it was the collapse of the gold standard in the early 1930s, due to massive speculative attacks, that prolonged and severely deepened the crisis. While some suggest countries should have left this fixed exchange-rate regime earlier to regain control over their monetary policy, it was the departure of a few smaller countries and then, in 1931, the United Kingdom that led to a series of competitive devaluations and a massive increase in protectionism. The resulting breakdown in international financial exchanges and trade worsened economic conditions in many countries, perpetuating high levels of unemployment and misery and, in turn, facilitating the rise of extremist ideologies and regimes. While conditions are different today, some parallels are evident and rather scary: speculative attacks on euro zone states, a reduction in international lending, a threat of competitive devaluations, protectionist tendencies, a rise of extremist parties, and social unrest. They say history never repeats itself, but, in this case, we really need to make sure it doesn't.
European integration has given a continent that had been divided and at war for centuries a lasting peace and unprecedented prosperity. Nobody should want to risk that. Now is not the time to point fingers, to play political games or indulge in collective obsessions. Now is the time to act.
Matthias Kipping is professor of policy and chair in business history at York University's Schulich School of Business.