The Ghost That Haunts Europe's Debt Crisis : Planet Money An economic disaster from 90 years ago may determine the fate of Europe's economy.
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The Ghost That Haunts Europe's Debt Crisis

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The Ghost That Haunts Europe's Debt Crisis

The Ghost That Haunts Europe's Debt Crisis

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JEAN-CLAUDE TRICHET: We have delivered price stability over the first 12 years and 13 years of the euro impeccably - impeccably. I would like very much to hear the congratulations for an institution which has delivered price stability in Germany over 13 years - almost 13 years.


JOEL GREY: (Singing) Willkommen and bienvenue, welcome, fremder, etranger, stranger.


Hello, and welcome to PLANET MONEY. I'm Caitlin Kenney.


And I'm Zoe Chace. Today's Friday, September 9. That was the president of the European Central Bank, Jean-Claude Trichet, you heard at the top. And we're coming to you today from Germany. Caitlin, you and I are right now, as we speak, in the lobby of our hotel in East Berlin. In an hour, we're catching an overnight train.

KENNEY: Yeah. And people here are kind of starting to get rowdy, although I don't know why because all the beers over there for sale are non-alcoholic. But anyway, we're in Germany because if you want to understand why people in the United States are starting to worry about a double-dip recession, why stock markets all over the world are going crazy, Germany is the place to come for answers. Germany is the financial capital of Europe. It's going to be central to any solution to the European debt crisis. But the way Germans feel about this crisis has a lot to do with a crisis that happened almost a century earlier, a crisis that's still surprisingly fresh in the minds of most Germans today.

CHACE: Today we're going to talk about what those two crises have to do with each other. But first, the PLANET MONEY indicator. We turn now to our correspondent in New York.

JACOB GOLDSTEIN, BYLINE: Thanks, Zoe. I'm Jacob Goldstein. I'm here in New York. And I'm here to give you the indicator. Today's PLANET MONEY indicator - $240 billion. President Obama wants to cut payroll taxes by $240 billion next year. This is by far the biggest chunk of money in that big jobs bill that he announced yesterday. President Obama, he wants to cut the payroll tax for employees in half next year. The basic hope here is people will go out and spend that extra money and get the economy going.

If you're on the skeptical side you might say, well, people are just going to save a lot of that extra money, so it won't wind up helping the economy much in the short term. There's also a second piece of this. Companies, they also pay a payroll tax for each employee. And the president wants to cut this part of the payroll tax for small businesses and for companies that go out and hire new workers.

And of course, the idea here is if you make it cheaper to hire people, then businesses will hire more people. This is certainly true to some extent. And there are a bunch of analyses out there today saying, yes, the president's plan would lead to more jobs being created next year. But inevitably, if you do this, you will also end up giving a tax break to some companies that would have gone out and hired people anyway even if they didn't have a tax break. That's the indicator. Now back to Germany.

KENNEY: Ok. On to the podcast. Europe's debt crisis has made headlines in the U.S. But here in Germany, it's everywhere. You can't pick up a newspaper without seeing headlines about the crisis. We've seen anti-euro graffiti on walls in Frankfurt. And people are constantly talking about it.

CHACE: And it makes sense. Germany is the country that everyone's looking at to solve the crisis. It's the strongest economy in Europe. That means pretty soon citizens of Germany might have to use their tax dollars to help out other countries. And we're going to talk about that in a future podcast. Today, though, we're going to talk about another reason that Germany is at the center of the European rescue effort.

KENNEY: Germany is home to the European Central Bank. The central bank is like the caretaker of the economy of Europe. It's a leader in trying to figure out this whole European debt crisis. But the tool the central bank might have to use to fight this crisis worries a lot of Germans. It touches on this trip wire in the German psyche, their almost primal fear of inflation.

CHACE: It's hard to overstate how much Germans worry about inflation. No one likes inflation, but no one obsesses about it like the Germans. Almost everyone we talked to worried about it. I had this cab driver. He quoted the inflation rate to us from memory. There's this ad campaign right now, one of the biggest banks offering a prize to whoever can predict the inflation rate. And even college kids worry about it. Bjorn Jansen (ph) is a student in Berlin.

BJORN JANSEN: You think this is the German angst to worry about inflation. This is true, even in the younger generation. The money - money should be worth something. If you worked and then overnight it's worth nothing, this is a threat.

CHACE: But has that ever happened to you?

JANSEN: No. To me, oh, I'm very lucky that this didn't happen to me. But I think it's a part of the German thinking.

KENNEY: Even now, almost a decade after Germans have stopped using their old currency, the deutsche mark, and adopted the euro, they still calculate how much things would have cost with the old currency, like this woman, Angelica Krauzernst (ph), who works at a wine shop in Frankfurt.

ANGELICA KRAUZERNST: When you give two euro for a newspaper then it's 4 D mark. And then you think, well, that's too much money. The amount is so high that you are scared. In a way, it's nonsense. But you do - you think of the old times, the good old times, and if life was cheaper then. And you think how much you paid for stuff. And then it's - the amount of money is so much bigger.

KENNEY: We're going to talk about what this widespread fear of inflation means for the European debt crisis in a minute. But first, why does this fear exist in the first place? I mean, the German inflation rate has been incredibly low and really stable since the mid-'90s.

CHACE: To understand why the threat of inflation was burned into the German national psyche, you have to go back a lot longer to the 1920s during the Weimar Republic. I met historian Carl-Ludwig Holtfrerich in the pouring rain outside the Reichstag, the German Parliament building then and now to talk about it. He said there's a reason Germans still obsess about inflation. During the Weimar times, it was out of control. It's arguably the most destructive case of inflation in history. The inflation rate was so high that your money lost value by the second.

CARL-LUDWIG HOLTFRERICH: There's this famous example that somebody sits in a pub and orders a beer. And immediately when the waiter carries the beer to his table he orders the second one. And the waiter says, well, you haven't finished. Yes, but if I don't order now, prices will be doubled within - before I (laughter) finish my first beer. (Laughter).

CHACE: Shopkeepers would have signs in their windows, blackboards or just a piece of paper with the inflation rate. They would have to change the rate twice a day as prices jumped. And the minute you got your paycheck, you knew what to do.

HOLTFRERICH: When they were paid - let's say the wage bill was paid once a week - they would carry the bank notes - you know, they had a bundle of bank notes then with them - immediately to the shops and buy whatever they needed for the week before prices went up again.

KENNEY: So what was going on? The German government was in debt from World War I. They'd basically borrowed all the money they could from the rest of the world. But they still needed more. Soldiers back from the war needed money for pensions. War widows needed compensation. Other countries were demanding reparations. So the German government turned to the German central bank and said, print all the money we need. We'll just borrow it from you. Here's what happened.

HOLTFRERICH: What cost you 4 cents in 1914 before the war started, in 1923 it would cost you 4 billion. And they had to print money in such amounts and so fast because it was - price were always going up and up and up. There was new demand for bills that in the last months they printed them only on one side. At first, they stamped bills let's say of 10 million. They stamped them a hundred million or a billion, you know?

CHACE: And when the price would go up, they would just add a zero.

HOLTFRERICH: That's right, yeah.

CHACE: The marks were so worthless they were used as wallpaper in German bathrooms.

KENNEY: So once you've had an experience like this where your money becomes, I mean, kindling essentially, it doesn't leave you. And the obsession with inflation has never really left Germany.

CHACE: Especially because of what happened next.

MARIO DONTE: This is very interesting.

KENNEY: This is Mario Donte (ph). I met him and his family at their home in Frankfurt.


UNIDENTIFIED PERSON: Mario, that is Caitlin Kenney.

KENNEY: And he showed me his awesome stamp collection, including some stamps from the Weimar Republic.

DONTE: OK. The inflation was here. (Through interpreter) OK. This is at the time of inflation - 20 billion, 20 million.

KENNEY: That's right. Mario is showing us a 20 billion and 20 million mark stamp.

What do you think when you look at this?


DONTE: Help.



KENNEY: What did you - say that again.

DONTE: Help. (Through interpreter) I don't want this to happen again because it would mean he is coming.

KENNEY: Mario points to a page of stamps covered in swastikas. To many people here in Germany, it was the out-of-control inflation in the '20s that led to the rise of the Nazis in the '30s.

CHACE: You probably can't find a people in the world who have a better sense of the consequences of bad monetary policy. Klaus Frankenberger is an editor at one of Germany's biggest papers, the FAZ.

KLAUS FRANKENBERGER: Few have gone through different periods of inflation, hyperinflation of the 1920s or after the war. And you saw what social distress, dislocation it brought and eventually, you know, prepared the way for the Nazi to take over. This is something we'll never, ever entertain. I mean, Germans always have stability in mind, as you know. You know, order, stability, that's part of our collective DNA, I would say. But these historical experience tell every policymaker you don't mess around with inflation - never. You don't do this.

KENNEY: So what does this fear have to do with the crisis in Europe today? After 60 stable years in the deutsche mark, the Germans and their neighbors in Europe now share a currency - the euro - and perhaps more importantly, a central bank.

CHACE: When the euro was created, all the central banks of all the countries gave up their own personal right to print money. The only central bank with the power to create euros out of thin air became the European Central Bank. And this, of course, made the Germans very nervous. At the time they said, OK, we'll join your currency union, but on one condition - that the European Central Bank never be allowed to repeat the mistakes of the '20s. It has to be totally independent from the government. They can never have the power to go to the central bank and ask them to print money. And so the ECB was set up along very German lines - very German.

HELMUT SCHLESINGER: The construction of the European Central Bank is not nearly a hundred percent, but to a large extent a copy of the Bundesbank here.

KENNEY: This is Helmut Schlesinger. He was president of the Bundesbank, the German central bank, when the European Central Bank was set up.

CHACE: This was back right when the European Union was forming. And Schlesinger and a lot of German financial types basically insisted that the European Central Bank follow lots of rules that the Bundesbank followed, rules designed to ensure that what happened during Weimar would never happen again.

KENNEY: One of these rules is that the ECB is not supposed to lend money directly the governments.

OK. I'm going to get out the Maastricht treaty. We've been looking at this a lot since we've been here in Germany.

This is the treaty creating the European Union and laying out plans for the European Central Bank. And I know I read this to you before, Zoe. But listen just one more time, OK?

CHACE: Hit it.

KENNEY: Article 104 says the purchase of government debt by the ECB, quote, "shall be prohibited." Prohibited - got it?

CHACE: Yes, not allowed. And then the second rule the Germans insisted on, the primary job of the European Central Bank is to keep inflation in check. Only print just the right amount of money to keep prices very consistent.

KENNEY: This mission is so central to the ECB that it even has a cartoon on its website which depicts inflation as this ugly monster.


UNIDENTIFIED ACTOR #1: (As character) I don't believe it. He keeps on putting his prices up.

UNIDENTIFIED ACTOR #2: (As character) We'll never be able to buy anything here.

UNIDENTIFIED ACTOR #3: (As character) Well, then, you'd better have more money.

UNIDENTIFIED ACTOR #2: (As character) Wait a second. I know you. You're inflation.

UNIDENTIFIED ACTOR #3: (As character) Well done. Because you are so clever, I'm going to give everyone here a cash prize.

UNIDENTIFIED ACTOR #2: (As character) No. Don't.

UNIDENTIFIED ACTOR #1: (As character) Wow. This is great.

CHACE: And this brings us to the present, where now the ECB is at the center of the crisis in Europe. Remember; there are a bunch of governments that have borrowed a lot of money, money they can't pay back. And they've turned to the European Central Bank and said, can you lend us the money? Just tide us over.

KENNEY: But if the central bank did that, it would be breaking the rules. Remember; it said the purchase of debt instruments directly from member states by the ECB shall be prohibited.

CHACE: Rule follower. Don't be so German. Here's the conundrum. Countries in need are turning to the ECB for help. But in order to help, the ECB would have to break its own rules. It would have to buy debt instruments to effectively lend the countries money. The central bank's board voted on this. Each member country of the euro is represented on the board. There were four votes against it, and two of them came from Germans.

KENNEY: So that's the situation here. It's on the front page of the paper. It's on television. This institution, the ECB, which was supposed to be so German in its set up, is now seen by Germans to be rebelling. And they're not happy about it. It's making them doubt the whole euro project.

Here's German newspaper editor Klaus Frankenberger.

FRANKENBERGER: Roughly two-thirds of the public have lost trust in the stability of the euro. This is important and dangerous at the same time. Why is it dangerous? Because there are two things in Germany - in Germany's - German psyche that are important - monetary stability and soccer. So it tells you it's very important. Monetary stability is very important.


KENNEY: After we finish recording this podcast, we got a big piece of news, a very fitting end for the show. Germany's top representative on the ECB executive board, Juergen Stark, is resigning. The ECB says it's for personal reasons, but the timing suggests another reason.

Bloomberg is reporting that his announcement comes just days after he expressed strong opposition to the bank's bond-buying program on a conference call. Remember' Stark voted against the ECB doing this, against breaking the rules. We're going to have more about Germany and its complicated feelings about its role in the European debt crisis in the coming weeks.

As always, we want to know what you thought of today's show. You can email us,, or find us on Facebook or Twitter. I'm Caitlin Kenney.

CHACE: I'm Zoe Chace. Thanks for listening.


GREY: (Singing) Auf wiedersehen, a bientot.

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