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Germany faltering?

History plays a vital role in the psyche of nations. Germany, long the economic power house of Europe, may be faltering and its history does not help.

German GDP contracted in the second quarter of 2019 and companies are warning of declining profits. Most importantly its economy is driven by overseas trade and they are facing an 8% fall in exports due in part to the US:China trade war. The prospect is for worse to come if Trump follows through with his European tariff threats and the UK executes a hard exit. Germany needs to reflate, to spend on infrastructure and new technologies, and to reduce taxes. 

But this is where history kicks in. The Treaty of Versailles in 1919 doomed the nation to a decade of starvation, desperate war debt, high unemployment and political turmoil. There were more than 400 political murders in Bavaria between 1919 and 1927. It paved the way for Adolf Hitler, the Nazis and World War 2.

It also led to historic levels of inflation as the Weimar government reflated, printing money in a vain attempt to settle its debts. The memory has lived with Germany to this day and shaped its economic psyche.

In 1919 a loaf of bread cost 1 mark. By 1923 that loaf cost 100 billion marks! 200 factories were working full time to produce the paper for bank note production. $1 traded for 4.2 Marks in 1914, by 1923 $1 traded for 1 million marks. Half of Germany were out of work, most were starving.

Today Germany has a fastidious resistance to debt – it insists on a balanced budget – a political and emotional committment it terms “shwarze null” that could best perhaps be compared with our belief here in the US in “small government”. Merkel, in keeping with this mind set, sees no need for any stimulus. As she reaches the end of her time, and as the traditional coalitions of German politics break up and are reassembled, the country faces a challenge to lead Europe against the nationalistic US, to set its own strategy for coping with an immediate tariff war, and to reflate the economy so as to reclaim its position as the power house of the Union. The European crisis is continuing.

Have a good day, James