Debt brake germany
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Debt brake: The moment and the trauma of hyperinflation

The German debt brake is forcing the government to pause for a moment.

The House of the Weimar Republic is currently commemorating a historical experience: the hyperinflation of 1923. “Nothing has made the German people – this must be recalled again and again – as bitter, as hateful, as ready for Hitler as inflation,” wrote Stefan Zweig in his memoirs about The World of Yesterday.

Debt brake: hyperinflation traumatised the young Weimar Republic

The governments of the Weimar Republic, financially plagued by gigantic post-war burdens, saw no other way than to guarantee financing by printing money. According to the Reichsbank, around 496 trillion in regular banknotes were in circulation at the end of the hyperinflation.

In November 1923, the currency was completely destroyed and a loaf of bread cost over 800 billion marks. In the last century, the introduction of the Rentenmark saved the Weimar economy, before the global economic crisis of 1929, bank failures and mass unemployment finally drove millions of Germans into the arms of the National Socialists at the beginning of the 1930s.

The trauma of these experiences and the realisation that the economy is part of destiny continues to the present day. As inflation has worsened since the outbreak of the war in Ukraine, it is the enormous increase in the cost of raw materials and energy that is causing prices to rise again. Many citizens in the country are complaining about the effects of inflation on their wallets.

On the tour of the special exhibition 1923 in Weimar, visitors are reassured about the pressing parallels. The exhibition’s display boards emphasise the differences to the past and the still manageable inflation rates in the current crisis. However, in view of the polarisation of people, the growing debt and the increasing importance of right-wing populists, comparisons with Weimar conditions are repeatedly drawn.

Clan Germany

Foto: Tim Eckert, Shutterstock

A successful economy cushions conflicts

And we are reminded that many social conflicts can be more easily cushioned by the means of a flourishing economy. The way in which the distribution struggles in the Federal Republic of Germany are taking shape in the face of genuine economic disruption is a major headache for many in the country. The old fears of a shift to the right leading Europe back to nationalism have long since become reality.

Discussions about the intrinsic value of money and the – typically German – conservative attitude towards debt have a long tradition. In 2012, the former President of the Bundesbank, Jens Weidmann, recalled the traditional context of the population’s basic economic attitude. For the banker, Goethe already recognised the core problem of monetary policy.

In his time, the poet had analysed the dilemma of today’s economy, which is based on paper money, and captured it in literature. Weidmann is impressed that the Principality’s finance minister illuminates the potentially dangerous connection between paper money creation, state financing and inflation – and thus the abyss of uncovered currency systems – in Faust II.

The state’s access to the central bank in conjunction with large financial requirements often led to an excessive expansion of the money supply, resulting in currency devaluation.


The topic of inflation has returned

The issue seems to be catching up with us again these days. For years, the German government kept the economy in the black. The coronavirus pandemic, the war in Ukraine and the energy crisis forced the state to borrow record sums. German national debt rose by 71 billion to 2.57 trillion euros in 2022.

However, escalating liabilities (and money printing) alone do not automatically lead to high inflation. Since the 2007/8 financial crisis, inflation rates in Germany and many other major industrialised countries have been low – despite rising government debt. Whether this will remain the case is controversial.

The current debt policy is criticised above all by economists from the right-wing conservative camp, such as monetarists, neoliberal representatives of radical market economic theories or followers of the Austrian school.

On the other hand, there are opinions that consider the debt level to be unproblematic and even warn that we are saving ourselves to death. Whether a path to sustainable prosperity can be achieved without taking new debt into account is one of the great questions of faith of our time.

It is important to understand the psychological side in the context of economic dynamics that characterise everyday life more than ever. In his book Money and Magic, Hans Binswanger explains the dogma of modernity: economic growth is the yardstick for the development of mankind. The economist understands the monetary economy in terms of an alchemical process: the search for artificial gold by other contemporary means.

The miraculous increase in money has lost little of its appeal to this day. Under the permanent necessity of economic growth, there is a growing inability to enjoy the wealth that is generated.

“The investor is therefore extremely worried about the future development of the economy. He can never be satisfied with the present. Rather, he becomes addicted to forecasts. He is on the lookout for all kinds of prophecies and feels constantly threatened by tidings of misfortune.”

This phenomenon explains our inability to take a longer view of the significance of current events, as new, bigger, more threatening scenarios are constantly looming on the horizon. Social media reinforces the impression of short lapses of human attention – be it in the modes of outrage, thoughtfulness or consternation. Broadcasters with a wide reach that spread emotions and simple messages among the people are very popular.

The tragedy of economies: no investment in the future

It is one of the tragedies of our time that economies are not investing large sums in important projects for the future but are wasting them on overcoming destructive crises under the pressure of the upheavals. Goethe’s Faust sought a way out through progress in the self-created, alchemical doctrine of money and value creation, from which worry seems to be excluded because it cancels out the limitations of the world and time.

“We live the conviction of modern man that he can overcome all the negative consequences of technology and economic growth with even more technology and even more economic growth,” writes Binswanger.

The idea of our own power allows us to continue the limitless process of creation ourselves. In addition, the ability to create gigantic amounts of money out of nothing creates enormous power options: Programmes for social welfare, ecological restructuring and new armaments projects to secure geopolitical interests can be financed. The price for this strategy is high, because halting progress or ending with the current situation becomes an illusion. Ultimately, in the absence of sustainable alternatives, the maxim is: keep it up.

Ironically, it is currently the Federal Constitutional Court that is putting a stop to the dynamic of money creation and reminding us of the debt brake enshrined in the constitution. The government had used an accounting trick to transfer 60 billion euros, originally earmarked for overcoming the coronavirus crisis, to another pot and used it to finance the climate and transformation fund.

No money for metamorphoses

Now there is a lack of money at all ends to initiate a metamorphosis that is similar in scale to an industrial revolution. The judges in Karlsruhe are forcing politicians to take a brief “wait a minute.” Robert Habeck, the Federal Minister of Economics, is not happy about the standstill: “I personally make no secret of the fact that I think the way the German debt brake is constructed is not intelligent enough.”

He fears that the old-fashioned brake will cause the mission of ecological reorganisation and the cushioning of its social consequences to fail due to financing issues. Instead of long-term budgetary policy, there is talk of an emergency and a state of emergency. The vision of freeing Germany from its dependence on gas and oil imports and switching to alternative energy is the country’s project of the century. The government is under great pressure. Now, the coalition between the Greens, Social Democrats and Free Democrats is holding firm despite the headwinds.

It is not so much the sympathy of the coalition partners and a shared conviction that is holding the alliance together and preventing new elections, but rather the prospect of Weimar conditions, which is evident in the electoral successes of the new right in the country. This brings us full circle: economic problems and the fuelling of fears are the ideal breeding ground for the rise of populists.

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