The Curious Case of Angela Merkel and the Disappearing Memory

Sherlock Holmes is Needed at Davos!

Over the past couple of years there has been a welcome revival of interest in the inscrutable fictional detective, Mr Sherlock Holmes of 221B Baker Street, London. We have had two successful Hollywood action movies and the BBC has brought him into the 21^st Century in a clever updating of the genre, now just finished its second BAFTA award winning series.

Notwithstanding his unfortunate watery experience at the hands of Professor Moriarty in 19^th Century Switzerland, one sincerely hopes that Mr Holmes can be persuaded to immediately attend at Davos for the 2012 World Economic Forum.  Never has there been more of a call for the forensic and dispassionate skills of Sherlock Holmes, than in the search for the illusive missing memory of Angela Merkel and most of her German political and bureaucratic colleagues. Despite glaring historical evidence to the contrary, of which more below, Frau Merkel continues to insist that the success of the German economic model has been exclusively derived from some form of Prussian Protestant work ethic, which now has to be imposed on the slackers and miscreants of the Mediterranean and Ireland, currently suffering within the Eurozone.

In a keynote address at Davos on 25 January, Frau Merkel insisted that “Germany was prepared to show its solidarity, but what we don’t want is something we will not be able to fulfil” (Financial Times – 26 January 2012)

She went on to state that part of the answer is to build on European integration rather than simply relying on Germany to guarantee the debts of weaker Eurozone economies.  Individual countries must also act to boost their competitiveness and ensure their debts were sustainable.

In response to the Chancellor’s uncompromising message, George Soros, echoing the views of most delegates also at Davos, blamed Germany for many of the Eurozone’s woes. “The austerity that Germany wants to impose will push Europe into a deflationary spiral. The fact that an unsustainable target is being imposed creates a very dangerous political dynamic.  Instead of pulling countries together, it will drive them to mutual recrimination”.  (Financial Times – 26 January 2012)

What is clear is that the German ‘Realwirtschaftspolitik’ has one big beneficiary and that is Germany itself.  At a time when double dip recessions are being experienced, or forecast for southern Europe, the Bundesbank is expecting 0.6 per cent growth in Germany in 2012 and 1.8 per cent in 2013.  This follows on a highly successful 2011 when growth was a chart topping three per cent.

But why has Frau Merkel lost her memory and what pertinent facts from the past appear to have been erased in true 1984 style from all discourse on these topics emanating from the German political and financial establishment?  Let us remind ourselves what the Chancellor said at Davos and indeed at many of the recent forums and EU crises meetings, often accompanied by her assistant and part time chorus, President Nicholas Sarkozy.  Frau Merkel stated that:

Weaker countries could not rely on Germany to guarantee their debts.

Such countries must boost their competitiveness and ensure their debts were sustainable.

Such seemingly reasonable, if harsh ‘instructions’ might appear sensible and accurate, however, they are in strikingly stark contrast to the way in which the wider world acted over the past 60 years whenever the German state and economy was itself in difficulty.  The appalling lack of solidarity shown by the current German administration either means that they are aware of the facts of the past and are wilfully ignoring them, or they genuinely do not understand their own economic history and the significant aid and forgiveness they have received.  Strange as it may seem, the possibility that German politicians and academics don’t know their own history could actually be true. If so, a little history lesson may not go amiss.

European fiscal consolidation 1939-1945

‘Hitler’s Beneficiaries’, is Professor Götz Aly’s fascinating book about the macro-economics of the German war campaign between 1939 and 1945, which was originally published in 2005 in Germany as ‘Hitlers Volkstaat’.  Professor Aly, who is a multiple award winning historian at the University of Frankfurt, attempts in this forensic book to answer the puzzling and frequently debated question, as to why the German population in World War Two was not more opposed to the Nazi regime. 

A significant part of the answer he maintains, (following extensive research in German and Allied archives of financial and economic material), lies in the fact that the German population was largely spared the actual cost of the war and was thus able to maintain a very high standard of living right up to May 1945.  In the main, the German war effort was actually funded not by the German people and their taxes, but by funds systematically extracted in the form of “occupation, administrative and forced labour costs” from not only each of the 16 states from Norway to Greece that were occupied during the campaign  but also from Germany’s wartime allies.  Professor Aly has calculated that, whereas the total external war revenues from these sources amounts to some 168 billion Reichsmarks, the amount contributed from internal German sources, largely taxation, was only 84 billion Reichsmarks. 

To put this in context, the contribution from other foreign European sources to the German war effort in today’s money is the equivalent of €1.7 to 2 trillion, (US$2.2 to US$2.7 trillion).  This is a reasonable chunk of change in anyone’s book and, as Götz Aly points out only includes the actual cost of soldiers and materiel and doesn’t include any figure for war damage, infrastructural destruction or civilian and military casualties.

The 1953 London Debt Agreement – Vergangenheitsbewältigung

Following the fall of the Berlin Wall and the reunification of Germany in October 1990, most people’s attention was understandably focused on the scenes of jubilation in Germany, celebrating the fact that the long period since the second world war had finally come to an end.  What achieved less attention in the world’s press was the announcement two days later that the German Debt Administration was to issue a new set of bonds. 

“Those who read the headlines in a newspaper article might have thought, reasonably enough, that the  new bonds were to pay for investments to upgrade the former East Germany’s crumbling infrastructure, or to smooth the cost of bringing the former East Germans to the living standards enjoyed by those in the west.  But these new bonds, in fact, were intended to repay debts that Germany had incurred as long ago as the 1920s.” (Timothy W. Guinnane, Yale University Economic Growth Center, Central Discussion paper No. 880, January 2004)  

The 1953 London Debt Agreement was a result of a detailed negotiation, which took place between February and August 1953 between Germany and over 20 creditor nations, including large creditors such as the USA and UK, but also interestingly in today’s context Spain, Italy, Greece and Ireland. Under the agreement the pre and post war debts of Germany, which totalled about 30 billion marks were reduced by 50 per cent to 15 billion marks.  Some scholars have argued that the reduction was in fact significantly more than 50 per cent, as the formula for compound interest on the pre-war element resulted in a very low figure.  However, the agreement capped the total in any event at 50 per cent.  The repayment schedule was highly favourable to Germany.  In the period from 1953 to 1958 only interest was to be repaid.  After that annual payments of interest and principal were made, with the final payment in 1983, some 30 years after the signing of the agreement.

The agreement also had managed to defer part of the interest on the pre-war debt and this was only repayable on German unification.  This portion was the reason for the new bonds in 1990 mentioned above.  These were eventually completely repaid by 2010, some 57 years after the London Debt Agreement and some 91 years after the first of the liabilities had arisen in 1919.

Smoke and mirrors and the Stability and Growth Pact

Under the terms of the agreements for the foundation of the Euro, member states are obliged by the Stability and Growth Pact, to keep their annual deficits below three per cent of GDP.  The Pact was a device insisted on by Germany as a recompense for leaving the Deutschmark behind.

However, no sooner had the Euro been established than two member states immediately broke the three per cent limit.  These were France and Germany.  In December 2004, Germany entered into a ‘stability programme’ with the EU Commission to reduce the German deficit to 2.9 per cent and thus prevent a fourth year in a row where Germany would breach the rules, it itself had insisted upon.

Included in a package of measures totalling €10 billion to reach the targeted 2.9 per cent were such interesting accounting tricks as the securitisation for €6 billion of the future pension payments of Deutsche Post and Deutsche Telekom, (with the state then assuming the future liability) and the sale of future revenues to the state from Landesbanken owned by the state, but which the EU deemed to be a reduction in state debt. A further €1 billion was achieved by the sale and leaseback of Government offices in the State of Hessen, where the new long term leases were also ignored for the purposes of the deficit calculation. (Financial Times, 13 December 2004)

Do As I Say Not As I do

The above three examples from comparatively recent German history show that far from being a paragon of fiscal rectitude and economic discipline, Germany has repeatedly got itself into serious economic trouble.  Leaving to one side the enforced contributions during the second world war, in peace time other countries, either as creditor nations, or as fellow member states of the EU, have never stinted in finding out ways to help Germany when these events occurred.

The exceedingly generous terms of the London Debt Agreement with a 50 per cent write off and massively deferred repayment periods shows what can be done to help countries in difficulty and to prevent global contagion caused by self-defeating austerity.

In pondering the future destiny of Europe, the euro and even world trade and economic health, the powers that be in Germany, if for no other reason than their own self-interest really should pick up a history book and cease the lecturing. 

Sherlock, where are you?

Peter O'Dwyer
Peter J. O’Dwyer is a business and financial consultant with a number of interests. He primarily specialises in providing bespoke advice to cross-frontier businesses, in particular to those involved in international investment funds, holding company structures and structured finance and to Governments and regulatory authorities. He is Managing Director and proprietor of Hainault Capital Limited, based in Ireland. He is a non-executive director of several private and public companies, including investment companies, mutual funds, energy, property and hedge funds domiciled in Ireland and the Cayman Islands for amongst others; HBOS, Barclays Capital, Citigroup and BNP Paribas. He is a former director of a Shari’a hedge fund and has lectured widely on the subject of Shari’a investment funds.