Saturday, 7 July 2012

Bundesbank Blues

The division of Germany following World War II counts as a tragedy to many Germans; indeed, it was nothing less than forced separation into the warring Global political order of the Cold War. As such the subsequent Wirtschaftswunder in West Germany was an outstanding feat of spontaneous economic growth. By the 1960s, along with Japan, her axis partner no less than twenty years previous, West Germany was fully reintegrated into the Global Economy; and she returned to the core of European growth and industry.

The independence of West Germany's central bank, the Bundesbank, in 1957, allowed for a ferociously autonomous and apolitical monetary policy to steer the Deutschmark and German inflation to credible and sustainable levels. The economy operated at full capacity and employment for much of the second-half of Bretton Woods.

Following 1973, in an attempt to counter aberrant U.S. economic policy, Germany and France resolved to go further into a pan-European economic union. At first as co-partners, but the Bundesbank by the 1980s evolved into the dominant central anchor for the European Monetary System (EMS); which led to devaluations of the Franc multiple times throughout the 1980s and a general German intolerance towards Mitterrand's socialist ideals.

Post-Bretton Woods unemployment was partly a consequence of misguided economic orthodoxy of stop-go Keynesian policies in minimising the output gap at the expense of other targets. In fact it was counter-productive and led to a lost decade of stagnation and stagflation. With the Bundesbank back in her driving seat by the late 1980s, unemployment was lowered and monetary credibility lent to other members of the EMS. It was only when German reunification led to the Deutschmark being exchanged at a politically-arranged ratio of one-to-one with the Ostmark, when the black market rate was seven-to-one, that real wages and inflationary pressures boiled over into unemployment and capital loss. 

Following the 1993 exchange rate crisis, a hardy bunch of European diehards followed the pledge towards long-wanted European unification into the European Monetary Union; an unprecedented experiment in monetary history. The newly created European Central Bank (ECB) borrowed much of the hard-won credibility of the Bundesbank; but unlike the latter, in her history the ECB was always conservative in brandishing her tools in confronting profligacy and excess. When the final epitaph to the European Debt Crisis is written in the next few decades, the ECB would take much of the blame for her slowness in reacting to the Crisis and her ineptness in failing to recognise and resolve the early warning signs.