Print or Die

By Danny Esposito for Investment Contrarians | Jun 8, 2012

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I previously discussed the debt-binge party that got the eurozone into the mess it is currently in. Now, I’d like to focus the discussion on the key country that I believe will decide how this grand plan called the eurozone will be determined: Germany.

In the early 1920s, Germany experienced what can only be described as the perfect hyperinflation storm. It ravaged the country, leading to hunger, suicides and destitution of unimaginable proportions. The scars of that hyperinflation still resonate with the German people today.

But the scars run deeper and influence policy today in the eurozone because it was from this hyperinflation depression that the destitute people desperately searched for answers with which to alter their lives. The answer came in the form of Adolph Hitler.

After the debt party that I previously discussed, Germany was determined not to join in the call for money printing because its central bank—the Bundesbank—has erected symbols of the Weimar hyperinflation in its halls. It was money printing that led to the hyperinflation, which then led to Hitler gaining political power. So, Germany said “never again.”

Although the rest of the world and the rest of the eurozone claim that Germany is overreacting, I’d argue that if our culture was responsible for not only hyperinflation, but also Hitler, we’d be just as hesitant to follow policies that led to the disastrous events of the 1920s.

After the financial crisis hit in 2008, Germany resisted the calls to print money and was able to have France by its side, which went along with the German ideology of austerity. Germany deemed austerity measures to be the only way that the eurozone countries could right their ship and get back on track.

One can’t solve debt with more debt and greater spending. The only solution was to reduce debt and social programs that the countries could not afford in the first place, to the point where debt becomes manageable. From this, growth can then resume in the eurozone.

Germany suffered through such a transition; the rest of the eurozone needed to toe the line as well. The problem is that the austerity measures caused a lot of pain and led to the countries contracting—to the point where they are in a deep recession and, for some southern eurozone countries, a depression. Unemployment is skyrocketing, and there is no growth to be found.

The people of France were frustrated—to the point where the first socialist leader in almost 20 years was recently elected. France, along with many other countries of the eurozone, is now calling for growth with austerity.

Even Greece, which is holding elections in a month, wants to remain in the eurozone, but it doesn’t want to continue on the path of austerity. France also wants to decrease the retirement age along with other social benefits, but it doesn’t say how the already indebted nation will pay for it.

So, Germany now stands alone (along with Austria and the Netherlands, but they are small countries) and must decide whether to give in and print money to satisfy this “growth” initiative or walk away and allow the eurozone experiment to completely unravel because the other eurozone members say that they will no longer tolerate austerity.

With hyperinflation as a real possibility in the future because of money printing, Germany is left with the choice to print or let the eurozone experiment die.

Tags: eurozone, hyperinflation