Peter Temin: “Merkel acts like Chancellor Bruening in 1931”

By Gustavo Matías | Professor Emeritus at MIT, Peter Temin understands why German Chancellor Angela Merkel bullies everyone into austerity. But he disagrees. Temin believes too many, too deep budget cuts can prevent countries from paying their debts as it has already been the case in Greece.

So Germany could destroy the euro and put the global economy under risk? Something similar happened in 1931, also because of Germany’s influence, and led the US to raise interest rates amid a full recession. The dollar was saved but the economy was shattered after sharply upping the discount rate in October. It was then when the great depression really exploded and lasted for about 10 years. The spread of that crisis began when countries seized the gold standard as deflation tool for their economies. That led to currency crises in the summer of 1931.

Germany said it could not pay reparations. This was announced by chancellor Brüning in May, only for domestic consumption, as now Merkel does with Greece. It was followed by an international lending crunch and a foreign exchange currency crisis in July. Britain unveiled a big deficit, the devaluation of the sterling pound and the abandonment of gold standard in September, while keeping its high interest rates at the beginning, like the US.

You see little difference between short and long cycles, but attribute more importance to internal causes than external. What does your research point at as a way to avoid the threat of a depression? We economists are awful at forecasting the future because are highly influenced by politicians. Paradoxically, it is best to look at long term rather than short term. If we look at short term, we will find another Great Depression. We are not yet in a global depression, partly because of our better safety nets and because we have less unemployment than in the thirties.

Let us be reminded of the trajectory of the Depression from an initial contraction in 1929. Currency crises came in in 1931. The question is if, after the contraction of 2008 we could now avoid a currency crisis in 2012. To answer that, we should also remember Keynes and his role in the negotiations on the post-war exchange rates. He wanted symmetry and the US opposed. Keynes advocated for a system of general equilibrium taking exchange rates as the connection between countries. Now we have largely forgotten about it. The current exchange rate regimes, the euro and the stability of the dollar-yuan, are in practice similar to the gold standard. The euro was supported by treaties without even an escape clause. It didn’t even have the necessary tax coordination, at least until the new intergovernmental treaty.

What is Germany doing wrong in Europe? Germany is like the US in the 1920s, having generated large trade and current account surpluses. The German surplus hit southern Europe. In the early stages of the introduction of the euro, peripheral countries had a boom thanks to high wages. But now they need to lower them to recover. Since they can not devalue, they must be ‘deflated’, so Germany’s austerity argument seems to be the winner of the debate.

So all this austerity talk comes from Germany… Well, yes. Merkel has exported her views and promotes austerity everywhere. But that fact is that this tends to prevent countries from paying their debts. She has not only rejected devaluation as an alternative, she rejects inflation, too. In practice, she is refusing to work on economic growth, and this is no good way for the euro. Merkel only cares about her domestic supporters, advocates for austerity even in Germany. She behaves like Chancellor Brüning in 1931, who also pleased his supporters but triggered a crisis.

How should we look at the current severity and consequences of the financial crisis in Spain? Is this a capitalism-wide crisis? No, it is not. Capitalism is not in crisi. The biggest problem in Spain is that it is a consumer country rather than a producer of new goods and services, mainly in relation to Europe. But I hope that Spain can avoid the worse and save the quality of the Spanish lifestyle.