In this latest PRIME publication, Geoff Tily argues that parallels between events in Greece today and Germany in the 1920s go much further than commonly understood, and the policy implications are more far-reaching. Economic crisis in both countries originated in financial liberalizations, involving the gold standard in the 1920s and the euro in the 2000s. Austerity was imposed by external authority. In Germany, after immense suffering but in fact before (if only briefly before) Hitler came to power, austerity was eventually rejected.
Fundamentally, the eventual fiscal difficulties faced by both countries arose from dysfunctional monetary arrangements that were imposed by global financial interests.
· Both episodes were part of a process of financial liberalisation, the first beginning after the First World War, the second from the 1970s/80s on
· This involved Germany and Greece respectively newly joining a deeply flawed currency union at an overvalued exchange rate, permitting very relaxed monetary conditions
· Under the new regime, excessive expansion was unleashed, including debt inflation, a sharply widening current account deficit and counter-parting capital account inflows
· Boom gave way to bust, and debt deflation
· International creditors demanded austerity in exchange for financial support
· Unemployment rose to over 28 per cent
The sufferings of the peoples on both occasions were and remain immense. But the details of the events in Germany are overlooked, seemingly as a result of emphasis on reparations. The crises of the 1920s and early 1930s were not the result of reparations, but instead of the highly orthodox economic and financial policies of the 1920s that were the quid pro quo for support with reparations from the financial sector.
Read the full publication: Lessons of German history: Trading Austerity for Debt Relief is Savage, Stupid and Futile