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Monday, February 16, 2015

Paul Krugman: Weimar on the Aegean

The lesson of Weimar Germany is different than many people think:

Weimar on the Aegean, by Paul Krugman, Commentary, NY Times: Try to talk about the policies we need in a depressed world economy, and someone is sure to counter with the specter of Weimar Germany, supposedly an object lesson in the dangers of budget deficits and monetary expansion. But the history of Germany after World War I is almost always cited in a curiously selective way. We hear endlessly about the hyperinflation of 1923, when people carted around wheelbarrows full of cash, but we never hear about the much more relevant deflation of the early 1930s, as the government of Chancellor Brüning — having learned the wrong lessons — tried to defend Germany’s peg to gold with tight money and harsh austerity.
And what about what happened before the hyperinflation, when the victorious Allies tried to force Germany to pay huge reparations? ... In the end, and inevitably, the actual sums collected from Germany fell far short of Allied demands. But the attempt to levy tribute... — incredibly, France actually invaded and occupied the Ruhr, Germany’s industrial heartland, in an effort to extract payment — crippled German democracy and poisoned relations with its neighbors.
Which brings us to the confrontation between Greece and its creditors. ... Greece cannot pay its debts in full. Austerity has devastated its economy as thoroughly as military defeat devastated Germany...
Despite this catastrophe, Greece is making payments to its creditors ... of around 1.5 percent of G.D.P. And the new Greek government is willing to keep running that surplus. What it is not willing to do is meet creditor demands that it triple the surplus..., cuts have already driven Greece into a deep depression...
What would happen if Greece were simply to refuse to pay? Well, 21st-century European nations don’t use their armies as bill collectors. But there are other forms of coercion. We now know that in 2010 the European Central Bank threatened, in effect, to collapse the Irish banking system unless Dublin agreed to an International Monetary Fund program.
The threat of something similar hangs implicitly over Greece, although my hope is that the central bank ... wouldn’t go along.
In any case, European creditors should realize that flexibility — giving Greece a chance to recover — is in their own interests. They may not like the new leftist government, but it’s a duly elected government whose leaders are ... sincerely committed to democratic ideals. Europe could do a lot worse — and if the creditors are vengeful, it will.

    Posted by on Monday, February 16, 2015 at 09:33 AM in Economics, International Finance | Permalink  Comments (17)


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