Through the past, darkly, for Europe’s central bankers

7/2/2016

By Wolfgang Munchau

Today’s economic situation in Europe has parallels with the 1930s and Hitler’s speedy recovery

Re-reading John Weitz’s biography of Hjalmar Schacht, Hitler’s Banker , I noted some interesting parallels between the 1930s and now that I had not considered before. It is well known that Hitler relied on Schacht, his central banker, to help fund his rearmament plans. But Weitz also pointed out — and this is potentially relevant to the situation in the eurozone today — that Schacht was only able to pursue his unorthodox policies at the Reichsbank because he had the backing of a dictator.

If an extremist leader came to power in a large eurozone country — France or Italy, say — what would happen if they were to appoint a central banker with the acumen of Schacht? And what would be the chances that such a team could succeed in increasing economic growth in the short term?

Let me say straightaway that I am not comparing anyone to Hitler — or indeed to Schacht. My point concerns what an unorthodox central banker can do if he or she has the political support to break with the prevailing orthodoxy.

Schacht had two stints as president of the Reichsbank — in the 1920s, when he brought an end to the hyperinflation then crippling Germany, and again from 1933 to 1939. It is hard to identify him with a single economic outlook: in the 1920s he was in favour of the gold standard but then, in the early 1930s, he opposed the consensus that promoted the policies of austerity and deflation. Schacht argued, rightly, that Germany was unable to meet the reparation payments specified in the Young Plan, which was adopted in 1929.

On returning to the Reichsbank, Schacht organised a unilateral restructuring of private debt owed by German companies to foreigners. The German economy had already benefited from withdrawal from the gold standard in 1931, and Schacht piled stimulus upon stimulus. One reason for Hitler’s initial popularity in Germany was the speedy recovery from the depression, which was no doubt helped by a loose fiscal and monetary policy mix.

The current policy orthodoxy in Brussels and Frankfurt, which is shared across northern Europe, has some parallels to the deflationary mindset that prevailed in the 1930s. Today’s politicians and central bankers are fixated with fiscal targets and debt reduction. As in the early 1930s, policy orthodoxy has pathological qualities. Whenever they run out of things to say, today’s central bankers refer to “structural reforms”, although they never say what precisely such reforms would achieve.

In principle, the eurozone’s economic problems are not hard to solve: the European Central Bank could hand each citizen a cheque for €10,000. The inflation problem would be solved within days. Or the ECB could issue its own IOUs — which is what Schacht did. Or else the EU could issue debt and the ECB would buy it up. There are lots of ways to print money. They are all magnificent — and illegal.

There are no Nazi parties in the eurozone today, except in Greece. But France and Italy have populist parties on the right that are clearly outside the current policy consensus. Imagine a scenario in which Beppe Grillo, leader of Italy’s Five Star Movement, were to win the Italian election in 2018.

The term of Ignazio Visco, governor or the Bank of Italy, expires in November that year. Mr Grillo would be in a position to appoint his own central banker. Perhaps he would choose someone as resourceful and ruthless as Schacht and able to plot Italy’s way out of the euro, via a parallel currency regime for a transitional period, defaulting on foreign debt in the process.

The devaluation and the increase in public sector investment which would be possible under a new regime could bring instant economic growth.

If Marine Le Pen were to become president of France in 2017, she might have to wait four years before she can seize control of the Bank of France. The term of François Villeroy, the governor, does not expire until 2021. Given the power vested in the French presidency, however, Ms Le Pen might not need the support of her central banker to do whatever she wanted.

I have no doubt that any populist government in Europe would end in disaster but in the short run they may still succeed in raising economic growth, and this is what makes them so dangerous.

We should not expect an exact re-run of the past, however. As Karl Marx put it, this will be history repeating itself first as tragedy, then as farce. Even this cuddlier version of the 1930s would be a tragedy of sorts. The period of ever-closer union in Europe would be over and the euro experiment would have ended in failure.

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