Reading a review, not long ago, by John Lanchester of Michael Lewis’s book Boomerang: Travels in the New Third World in the New York Review of Books, I was struck by the following quotation of an unnamed German official explaining why there was no credit boom in Germany.
“There was no credit boom in Germany,” an official told Lewis. “Real estate prices were completely flat. There was no borrowing for consumption. Because this behavior is totally unacceptable in Germany.”
For a generation or two after World War II, the rest of the world was thankfully spared such expressions of insufferable German self-satisfaction. But as memories of the second World War gradually fade, and the victims of German megalomania are rapidly disappearing, it is apparently again acceptable in Germany to make statements as unbearably self-congratulatory as the horrendous quotation recorded above. And lest I be misunderstood, I am in no way suggesting that it is only Germans that are capable of the barbarities committed in World War II by the Nazi regime. “It can’t happen here” is a conceit too often refuted by bitter experience for anyone to feel very confident about his country’s (or his own) conduct in extreme situations.
There would be no point in highlighting an absurd statement by a tone-deaf German official if the statement did not reflect the views of many Germans, and none more so than the German Chancellor, Mrs. Merkel, though she is surely far too adroit a politician ever to express such a view within earshot of a journalist. But clearly the smug conviction in the utter rectitude of Germany’s anti-inflation posture and of the German insistence that the burden of discharging the sovereign debts incurred by the debtor countries fall entirely on the individual countries, and not on the Eurozone as a whole (i.e., not on Germany), stems from the moral certainty that the debtor countries are asking to be forgiven for “behavior that is totally unacceptable in Germany.” What self-respecting German could possibly agree to absolve those countries from the consequences of actions that no German would ever dream of undertaking?
That is the hubristic mindset that impels Mrs. Merkel and her countrymen to lead the European Union into the abyss. The whole point of the European Union was somehow to embed and contain Germany within the democratic framework of a larger union in which Germany might play an important, but never a dominant, role. For almost 60 years, the Federal Republic of Germany was in almost every way an admirable modern European state, playing a cooperative and constructive role in both European and world affairs. But especially after reunification, Germany has gradually assumed an increasingly preeminent role in Europe, and now the fate of Europe, and perhaps of the world, again lies in the hands of a German Chancellor, a leader perfectly attuned to the sentiments and intuitions of her people, and utterly oblivious to the consequences of what she is about to do. What we are witnessing is not a Greek tragedy, but a German one. But, I greatly fear that we shall all suffer the consequences of her misplaced confidence in the uprightness of her position and in her flawed understanding of Germany’s national self-interest.
Uneasy Money 
one commenter noted to me that the Maastricht treaty must be upheld!! The Law!! um, weren’t the German’s one of the first to flout it? There are no mortgage markets in Germany??
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Wow!!!
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Fascinating post. Personally the trouble seems to be that groups/countries move to extremes related to the use of credit for consumption. Obviously this German ideal is too extreme to impose on the entire Eurozone without severe consequences. At the same time, I can’t help but think that several other countries (including the US) have become far too complacent with borrowing for consumption, to the point where the extra burden is forgotten.
I recently discussed/linked to a post by The Arthurian about the important difference between spending money and credit (http://bubblesandbusts.blogspot.com/2012/05/cost-push-vs-demand-pull-inflation.html). It seems that some middle ground between Germany and Spain might be ideal but achieving that end will be politically (and socially) difficult.
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There was no housing boom in Germany because German law means that housing (land) supply responds directly to housing demand (to use Krugman’s language, there is no Zoned Zone). German house prices (on average) move at about the rate of inflation and have done across almost the entire postwar period (except when the addition of substandard East German stock caused a fall in average prices).
Places in the US where housing (land) supply can respond easily to demand (in Krugman’s language, Flatland) generally did not have much of a housing boom either.
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Excellent article. Think of native americans, or Japanese held in camps during WWII. Also, Staling or Mossolini. There are tons of bad examples in history. On the last paragraph, I would really think that Greece has no role to play. Just think about the GDP is tiny compared to any other European nation. Germany has no national interest in a country that has done nothing good in terms of economics. Lastly, I’m much more worried about a slowing China. We get to easily distracted by a tiny country like Greece.
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I got the impression mortgage markets were somewhat limited when a friend visited a little town in Germany some years back, and locals were concerned he had come to reclaim old family property.
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>German insistence that the burden of discharging the sovereign
>debts incurred by the debtor countries fall entirely on the individual >countries
That’s because when those countries borrowed that money they agreed to pay it back. It has nothing to do with the attitude of Germans to personal debt, it has everything to do with people fulfilling the obligations that they have voluntarily assumed.
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“it has everything to do with people fulfilling the obligations that they have voluntarily assumed.”
which they assumed before the ECB was kind enough to smash the economy with inappropriate rate hikes. by the way how about the complicity of those banks making the loans? it takes two to tango you know.
the bottom line is that for people to repay debt they need to have income. if you let nominal income fall, nominal debt becomes that much more risky.
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dwb, Right on both counts.
Marcus, What can I say?
Woj, My point is that imposing draconian austerity on an unwilling population in the midst of a depression will not work. First you must end the depression, primarily by monetary expansion, and then you can work toward budgetary and other economic reforms. If the Germans had encouraged greater monetary expansion allowing NGDP to increase in all Eurozone countries, the Eurozone would not be imploding.
Lorenzo, Good point. Thanks.
Tas, Thanks. All countries have committed crimes. My point about Greece is that it is not Greece that is the source of all the troubles in the Eurozone.
Becky, I admit that I have no knowledge of what the status of mortgage markets is in Germany.
Jason, And the lenders accepted the risk that the borrowers would not pay it back. Debt contracts are symmetrical and both sides accept some risk. And creditors who look after their own best interests often realize that it is in their interest to accept partial repayment of what they are owed rather than insist on full repayment no matter what.
dwb, Right, again.
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