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Stunning Similarities

While Germany won’t ever forget about the hyperinflation disaster of the early 20’s – something The Economist recently referred to as Germany’s hyperinflation phobia[1] – the German debt crisis right before the Nazis seized power surprisingly seems to have widely faded away from collective memory. Specifically when observing the German debate on to which degree the ECB shall be allowed to financially support the crisis-stricken, indebted south European countries, it seems odd that this part of German history remains almost unmentioned.  In contrast, though, German opinion makers seem to never tire of emphasizing the bitter experience made by hyperinflation when debating on potential instruments of the ECB’s crisis management.

After World War I and the accompanying hyperinflation Germany borrowed heavily from the US in order to finance the war reparation payments but also used debt to boost economic growth. Thus, it was basically a credit bubble that financed Germany’s Golden 20’s, a situation very similar to the economic boost experienced by South European countries before the arise of the financial crisis in 2008. Then, in 1929 the Great Depression erupted in the US causing the German bubble to burst. At once there was a sudden stop as US banks started withdrawing funds from Germany and suspended new lending. In the course of the increasing pressure of debt repayment Germany’s US $ reserves were shrinking which forced Germany to build up a trade account surplus in order to earn the US dollars needed to settle its debt. But as Germany’s currency was tied to the gold standard the possibility of devaluation was not given, while the defense of the exchange rate was further accumulating the decline of US $ reserves. Furthermore, due to the Great Depression the US demand for imports was plummeting, and so did German exports. Thus, the only way to pay back debt and regain trust from international investors was strict fiscal tightening. However, this was resulting in a banking crisis including bank panics, bank socialization and a credit crunch paralyzing the economy and consequently leading to rising unemployment up followed by mass demonstrations and violent clashes of political opponents. When foreign reserves were finally exhausted, so that the exchange rate was not anymore defendable, Germany was forced to abandon the gold standard and to devaluate its currency. But the effect did not sufficiently boost exports in order to earn the dollars needed to keep up with the debt payments. Between 1929 and 1932 the German GNP declined by 25 %, culminating in an unemployment rate of 30 % in 1932. The disastrous economic situation represented fertile ground for the radical political fringes and accompanied by the debt default in 1933 the Nazis seized power[2].

If one imagine, how the course of history may have gone if debt would have been restructured in a way to better avoid such a deflationary economic development it gives cause for thought. Something the US – being the major creditor – had learned from, which gave rise to the Marshall Plan after the disaster of WW2. Of course, in the awakening of the cold war, complemented by the importance of European export markets for the US economy, there was much political calculation involved, however, it gave Germany the possibility to rebuild the economy by creating an efficient institutional framework, that led to the impressive economic growth during the 60ies and finally to the full repayment of the loans granted by the Marshall Plan.

Today’s political circumstances are different; still, the similarities of economic pattern are stunning. Since the awake of the crisis Greek GDP was constantly shrinking and in 2013 unemployment reached a new record high of 27 %[3]; and with economic change inevitably comes political change. Today’s disastrous economic situation again is leading to the empowerment of radical political fringes – from both the left and the right extremes. A recent survey showed a 15 % public support for the Greek neo-Nazi party “Golden Dawn” and violent clashes between political opponents are increasingly reported.[4]

This time Germany plays a main part as being a main creditor and the long-term level of reimbursement depends on an economic comeback of the high indebted economies. Furthermore, Germany’s industries strongly depend on its export potential, which in turn is positively affected by the Euro that makes exports cheap, something that would not be the case without the Euro zone (an own German currency would highly appreciate). The allowance of the Target2 transfers, which remain relatively unnoticed by the public, show that German officials are aware of these facts, however, their political leeway is constrained by the voter’s opinion and still; the key aspect of how the German public widely perceives the financial aid is to pay for mistakes made by others rather than the economic and historical based moral rationales behind the support.  To extent the debate by German’s own history of deflation could help to shift the inner German discussion from the question of if to support to the question of how to best support to enable struggling countries to build the right institutional and economic frameworks to get back on track. But this of course would require further investments, which obviously is not feasible without sufficient financial support in the form of debt reliefs.

Hans Kaufmann and Svenja Telle
Macroeconomic Analysis – Fall semester 2013

[1] Cf.: The Economist (2013, November 15): “Germany’s hyperinflation-phobia” retrieved from

[2] Cf.: Ritschl, Albrecht and Sarferaz, Samad (2006): “Currency vs. Banking in the German debt crisis of 1931”; Humboldt University of Berlin

[3] Statista (2013): “Greece: Unemployment rate from 2003 to 2013”; retrieved from


Author: studentnovasbe

Master student in Nova Sbe

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