Broadcast on the BBC World Service Business Daily programme 1 February 2011
For the Federal Republic of Germany, sound money is seen as a precious birthright. In 1948, amid the rampant inflation of the old Reichsmark that followed the end of the Second World War, the western powers replaced that fast depreciating currency with the Deutschmark in the western part of Germany. For West Germans, sound money took the place of patriotism as a kind of national faith. And the modern Bundesbank, when it was created in 1957, was given powerful tools to defend the stability of the D-Mark: strict independence from the politicians in holding down inflation and setting interest rates.
The guardians of the faith were the stern-faced men of the Bundesbank—the “Buba” as it was popularly known—who adopted a monk-like aura of discipline and austerity. The Buba’s headquarters, a huge, featureless building in Frankfurt, is a cathedral to this monetary orthodoxy. Inside, a dignified calm reigns over rooms furnished in an ascetic style. But as the Wirtschaftswunder, the postwar economic miracle, took off, the Bundesbank came to be widely trusted and revered.
Politicians, though, are always tempted by the twin sins of overspending and excessive debt. And in the shotgun marriage of East and West Germany that followed the Fall of the Berlin Wall, Chancellor Helmut Kohl overruled the advice of the then Bundesbank President, Karl-Otto Poehl, ramming through German Monetary Union largely on the basis of a one-to-one conversion rate between the D-Mark and the far weaker Ostmark. As Poehl had predicted, it wiped out most of East Germany’s now uncompetitive industry, and sent unemployment and inflation soaring.
In time sound money policies worked again, and united Germany regained its economic strength. When the plan for a single European currency loomed into sight, Germany insisted that the European Central Bank’s rules should be modelled on those of the Bundesbank, and the ECB must be in Frankfurt. The Europe-wide battles over the rules for the whole eurozone rage on today, with Germany emboldened by the debt crisis to demand more fiscal and monetary discipline all round. Now, there’s even talk about the merits of a “Germanic euro”—code for one with far tougher rules to keep the euro strong, or possibly to restrict membership to those who can keep up with Germany. That, of course, is what the Buba had in mind from the start.