Greece is like Germany’s Weimar Republic

http://www.social-europe.eu/2013/01/greece-is-like-germanys-weimar-republic/

Recently I attended a German economic conference where the Euro crisis was hotly debated. What really shocked me was that economists almost unanimously agreed that the crisis countries’ recessions are necessary. These economists argued that the ensuing social hardship may be deplorable but necessary to throw unproductive firms out of the market and then allow high productivity firms to prosper, a pre-requisite for future economic growth.

This was the philosophy of Herbert Hoover’s treasury secretary Andrew Mellon who in the Great Depression thought that the solution to economic hardship was to increase it and to “liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate” – a “solution” that plunged the world economy and indeed Western civilisation into its deepest crisis. 80 years later, German economists seem to have unlearned the lessons from the Great Depression, the economic meltdown that especially Germans heavily suffered from.

This forgetfulness (or ignorance) has dire consequences. German economists and the German government are adamant in demanding fiscal austerity in the crisis countries, the most extreme case being Greece. But they should know better: There are uncanny parallels between today’s Greek depression and Weimar Germany’s in the late 1920s / early 1930s: Both economies were trapped in the straitjacket of a fixed exchange rate regime – the gold standard then and the euro now; both economies had huge foreign debts – the Germans mostly with the US, the Greeks with Germany and France. Both economies faced tremendous pressure from international financial markets. And both governments made matters worse by relying on severe austerity.

Figure 1 shows public expenditure in both countries before and after the economic crisis. For better comparability, the first crisis year – 1929 for Germany, 2008 for Greece – is normalised to 100 (data for Greece comes from AMECO, data for Germany comes from Albrecht Ritschl’s book Deutschlands Krise und Konjunktur (http://personal.lse.ac.uk/ritschl/AppendixA_and_B.xls).

Government expenditure rose in both countries when the crisis had already started since higher unemployment means that more has to be spent, for instance on unemployment insurance. But in the second crisis year, both governments switched to dramatic cuts in public expenditures which directly depressed economic performance: Government consumption and investment are part of the gross domestic product and cuts in expenditures on social security impact private households’ ability to keep up consumption when they are unemployed – which depresses business income.

The effects of austerity on economic performance were dramatic as figure 2 shows. The figure compares Weimar Germany’s economic performance (its gross national product) in the 1920s and 1930s with Greece’s in the 2000s (Data for Greece again comes from the AMECO database and for Germany from historical data by the Bundesbank (http://www.digitalis.uni-koeln.de/Geldwesen/geldwesen_index.html). Again, the two countries’ economic performance is set to 100 in the first crisis year.

The data show that Greece’s economic slump is even deeper than the Weimar Republic’s. Since the first crisis year, Greece lost almost a fifth of its output, Weimar’s output contracted by “only” 15 % – which was enough to bring down the first German democracy. Then as now, people suffer from hunger in a supposedly civilised society (see http://www.huffingtonpost.com/2012/03/13/greek-debt-crisis-greek-children-hungry-exercise_n_1342868.html, http://library.fes.de/jportal/servlets/MCRFileNodeServlet/jportal_derivate_00020744/afs-1987-145.pdf).

Did the austerity induced depression “free” the economy from unproductive firms and allowed productivity to increase afterwards, as today’s German economists believe? Almost, if you think that the whole of German industry was unproductive. In his masterful book on the Nazi economy, The Wages of Destruction, the economic historian Adam Tooze shows that the Great Depression brought the Weimar Republic’s entire heavy industry to the brink of collapse. German industrial giants like AEG were threatened by bankruptcy in the early 1930s and the big banks that financed industry – Deutsche Bank, Commerzbank and Dresdner Bank – would have been bankrupt if they had not been nationalised.

German industry was only saved by the Nazi government’s rearmament policies after 1934. This was one of the reasons why Germany’s big business supported the Nazis until the bitter end. Those can be the political consequences of a “liquidate everything” ideology that plunges entire economies into the economic and social abyss.