German Fears About Inflation Stall Bold Steps in Debt Crisis
BERLIN — Norbert Schulze was not yet born when the hyperinflation of the 1920s deeply scarred the German psyche. But he still remembers the Reichsmark notes denominated in millions and billions that years later were tucked into a box with the family’s old black-and-white photographs.
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“I’m worried about my pension and my savings and the problems we’re facing right now,” Mr. Schulze said.
Many economists say aggressive purchases of the sovereign bonds of heavily indebted states by the European Central Bank are the quickest and surest path to stabilizing the crisis. On Thursday, Mario Draghi, the bank’s president, laid the groundwork for bolder intervention in markets if certain conditions were met.
To German ears those bond purchases, or anything that smacks of printing money, sound like a recipe for skyrocketing prices. German leaders, including Chancellor Angela Merkel and her former economic adviser, Jens Weidmann, now head of the German Bundesbank, have strongly discouraged any such move by the European Central Bank, stalling the rescue of the euro zone in the view of critics.
The prospect of a dim historical memory — the antique photograph of the wheelbarrow full of nearly worthless bills — helping to drive the world off the economic precipice and into another deep recession may seem like the height of irrationality and even irresponsibility.
But the German obsession with inflation has been difficult to overcome because Germans perceive themselves as more vulnerable to inflation today than their neighbors are. It is a force they believe could reduce or wipe out the competitive and financial edge they have labored to build.
By robbing a currency of its value, inflation wipes the slate clean for debtors and savers alike. Germans say they like the slate the way it is because they are on the plus side of the ledger.
Consumer debt, whether credit cards or in many cases even home mortgages, is frowned upon here. According to figures of the Organization for Economic Cooperation and Development, the German savings rate was more than 10 percent every year between 2003 and 2009, while during the same period it bottomed out at 1.5 percent in the United States, and never rose above 6.2 percent. As a result German households had net savings of $4.3 trillion, according to the Bundesbank, in a country of fewer than 82 million people.
Germans own homes at a lower rate, 41.6 percent, than the 66.3 percent of Americans who do. And most people do not invest in the stock market here.
“For the average American, inflation means the home price is increasing and the value of debt is going down,” said Peter Bofinger, a prominent economist on Mrs. Merkel’s independent council of economic advisers, “whereas the German invested in life insurance and sitting in an apartment he rented is much more vulnerable to inflation.”
Fear of inflation is a deep and broad consensus in Germany, but one that Sebastian Dullien, an economist and senior policy fellow at the European Council on Foreign Relations, said had worsened appreciably in recent years. “It is not about the 1920s,” Mr. Dullien said. “The fear of inflation went up when wages stopped going up.”
In an effort to regain lost competitiveness over the past decade, Germany went through a period of wage restraint and labor-market reforms that made the hiring and firing of workers easier and welfare benefits less generous. While countries on Europe’s southern edge, including Greece and Portugal, were enjoying the cheap money that came with membership in the euro, Germans were developing a newfound sense of economic insecurity, one that paired all too effectively with an old dread.
That has real policy consequences. Kenneth S. Rogoff, a Harvard professor and former chief economist for the International Monetary Fund, has argued that the euro zone needs higher inflation of between 4 percent and 6 percent, well above the European Central Bank’s fixed target of 2 percent. “German leaders have told me they have a lot of leeway in a lot of dimensions, but the hot-button issue they cannot touch is inflation,” Mr. Rogoff said. “Inflation is poison to them.”
German magazines and newspapers regularly go to press with covers featuring euro coins and bills that are melting or in flames. This week’s Spiegel magazine shows a one-euro coin cracked in two halves under dark storm clouds with the words “And now?” Its competitor, the magazine Focus, has a 13-page feature on rising prices since the euro currency was introduced to consumers a decade ago.
“If I believed everything I read I would have to take a rope and hang myself,” said Helga Matthes, 59, a retired Lufthansa flight attendant. “My 85-year-old mother reads the newspaper every morning and has pains in her stomach. She tells me, ‘We’re going to lose everything again.’ ”
Woven together with historical memories and the German obsession with stability and safety, the mental block on inflation can be hard to slip. In the collective consciousness, hyperinflation stands as an important milepost in the slide to total catastrophe culminating with the total defeat of the Nazis in 1945.
But Adolf Hitler came to power in the wake of deflation, not inflation. The German economy shrank 7.7 percent in 1931 and 7.5 percent in 1932 under the watch of Heinrich Brüning, known as the hunger chancellor, who enacted harsh austerity measures that deepened the depression.
Economists who favor stimulus policies, and in particular action by the European Central Bank, say the German focus on inflation is woefully misplaced during a time of little or no growth and severe market turmoil. They say there are too many similarities between the cuts made by Mr. Brüning and those Mrs. Merkel has demanded of euro zone partners.
“There are historic parallels between deflation and the 1930s and what’s going on today, none with hyperinflation,” said Fabian Lindner, an economist at the Macroeconomic Policy Institute in Düsseldorf. Mr. Lindner pointed out that it was the middle class, with carefully gathered nest eggs to lose, more than the working class that lost out in the hyperinflation, searing the memory in the minds of an entire generation of teachers, academics and journalists who in turn would pass it on.
Under Hitler, the Nazi rearmament and jobs programs, including highway construction, quickly led to full employment. A second period of significant inflation was covered up by rationing and price controls until after the war, when the Reichsmark was exchanged for the Deutsche mark at roughly 10 to 1 in 1948, the second time savings were wiped out in a quarter century.
“Inflation, you see it, you almost smell it,” said Tobias Straumann, an economic historian at the University of Zurich. “People don’t understand that deflation is monetary stuff. They think it’s bad luck, a development that can’t be explained.”
As the current crisis has deepened and the reality has begun to hit home that a breakup of the euro is a possibility, the German news media have begun to confront the considerable costs, and risks, that would come with a breakup of the currency union, raising hopes that a solution is within reach.
Mr. Schulze, who after his heart attack sold the family auto-repair business where he now works as an employee, said that for all his concerns about inflation, “There is no other way other than to try to rescue the euro. Whether or not it works. …” he said, his words trailing off, the sentence unfinished.