The last Franco-german monetary conflict
One of the nubs of the euro crises is linked to the mandate of the European Central Bank (ECB). This institution, declared independent of governments, inexorably pursues a mission to control inflation, for which the threshold is set at 2%. The pulley that the ECB uses to control the level of inflation is its key interest rate whose modifications have a knock-on effect on the structure of the interest rates of the entire economy.
Of course, the ECB is also concerned by the level of economic activity in the Eurozone. However, this concern is secondary to the control of inflation. One of the best illustrations of this reality is the staggering decision by the ECB to increase its key interest rate two times in spring 2011 whilst Europe was crumbling under the weight of recession and the public debt crisis.
Why is the ECB so constrained by the control of inflation whereas evidence seems to point in favour of monetary policy flexibility comparable with what the USA and Japan have implemented?
The reason seems to lie in the (probably justified) fear held by Germany of seeing its Deutschmark, once transformed into the Euro, suffer successive devaluations. The Germans demanded the political independence of the ECB in order to avoid this institution becoming the discount bank for public debt. In this scenario, the ECB would have regularly had to increase the money supply in response to the budget and trade deficits of the weakest partners in the Eurozone. From the point when a currency is no longer backed by gold, it is important that strict discipline prevails with regard to its printing since only confidence guarantees its purchasing power. However, whilst this political choice was understandable in 1999, this is no longer the case in 2013.
This is because, beyond this German political demand, there is something else: for the Germans, public debt should be financed by private savings for which the maintenance of purchasing power is imperative. Since the hyperinflation in the Weimar Republic (1923) and the confiscation of their holdings during the replacement of the Reichsmark by the Deutschmark in 1948, the Germans demand a strong, deflated and disciplined currency.
Across the Rhine in Germany, there is therefore no question of reimbursing public debt via printing money. By way of comparison, the USA considers that public debt can be financed by money creation because the latter is operative. For the Americans, the value of currency is simply a secondary factor to creation of jobs. In a word, in Germany money is hoarded, whereas the dollar is destined to power consumption.
In more in-depth analysis, the very sociology of Germany is built on the fear of inflation, stemming itself from the influence of Protestantism which temporalized money. This theological background could explain why debt, in the eyes of the Germans, is unsound (the same term is used in Germany for “debt” and “fault”). Indeed, capitalism is thought to have come into being in the 16th century within circles of protestant beliefs. It is the austere spirit of Lutheranism that is said to have generated the modern market economy. Protestants do not consume their wealth and borrow even less. Unlike Catholicism, which is founded on repentance, the Reformed Church is, in part, based on the notion of pre-destination, which supposes a test in the future, because it should be proved, through work, that one merits the destiny ordained by God. In this respect, Protestant material success strengthens and confirms divine blessing.
This is far from the Catholic viewpoint which has maintained the greater importance of spiritual values over money, making depreciation of currency acceptable. An age-old Catholic creed renders money subservient to power and provokes guilt or even intolerance with relation to property wealth. This is how German currency was re-valued whilst the Catholic currencies of Southern Europe were depreciated or devalued. In Germany, money is a founding factor, whilst in France it is sovereign tool. Its devaluation is a reflection of its subordination to the wielding of power.
Such resurgence of religious contexts is applicable to the monetary disputes between the main partners in the Euro, namely France, the elder daughter of the Catholic Church, and German, the country of Luther. For example, the Deutschmark was re-valued by more than 100% between 1971 (the end of the Bretton Woods Agreement) and 1999 (the year in which the Euro was created) in comparison with the French Franc.
Evidently, religious factors are not in the least sufficient to fully explain the divergences between Germany and France. Military history has also forged monetary altercations. France always resented having to pay Germany excessive damages after its defeat in 1870 whilst never having obtained suitable compensation for the wars between 1914-18 and 1940-45 (even less so for the latter). As for Germany, it blamed France for having driven its country to the ruin of hyperinflation in 1923 and to default in 1933, through enforcement of the Treaty of Versailles in 1919. It even goes further than money: the French and German territories were demarcated by monetary negotiations – the German Empire was founded by Bismarck’s signature in Versailles in 1870 at the price of enormous war damages whilst European support for German reunification in 1990 was negotiated in exchange for the entrance of Germany into the Eurozone. It is therefore not a coincidence that the first two attempts at fixed exchange rate monetary unions (the Latin Monetary Union of 1865 and the Golden Block of 1933) excluded Germany.
Henceforth, the single currency represents a forced reconciliation of two antagonistic monetary cultures. The Euro survives because France and Germany both see it as a temporary advantage: Germany has seen its domestic market boosted whilst France has enjoyed German borrowing terms and conditions for its public debt. In Germany, the private sector has benefitted from the Euro, whilst in France, it has enabled the State to consolidate its role at reduced cost. Is this situation durable? Nothing is less certain. The economies of the two countries need to undergo greater alignment and mutual understanding needs to be the basis of monetary and budgetary equilibriums. Without such an arrangement, the single currency will simply serve to unearth ancestral disagreements. More than ever, the survival of the Euro relies on the fragile balance of the Franco-German axis.
