The Weimar Republic may be the right historical parallel, but the Germans and their ECB brethren are extracting the wrong lesson.
Today, Germany is the victor. Having implemented the difficult reforms needed to keep its labor costs down and its competitiveness up, it has emerged triumphant from the wreckage of the global recession.
The government’s 10-year bonds are yielding even less than U.S. Treasuries as investors flee Italy, Spain, France and even the Netherlands and Finland. Assuming the common currency survives, struggling euro-area nations will have little choice but to follow Germany’s example. They can’t go down the path to hyperinflation, because the ECB controls the printing presses.
A more relevant piece of wisdom might be drawn from a 1919 treatise called “The Economic Consequences of the Peace.” In it, British economist John Maynard Keynes warned the victorious Allies against impoverishing a defeated Germany with unduly harsh reparations after World War I.
“The financial problems which were about to exercise Europe could not be solved by greed,” he wrote. “The possibility of their cure lay in magnanimity.” Unfortunately, the winning side didn’t heed his advice until after World War II, when the U.S. implemented the Marshall Plan.
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