One of J.M. Keynes' clearest political statements was his analysis
of the disastrous economic consequences of the Treaty of Versailles
(The Economic Consequences of Peace, John M. Keynes, 1919). A number
of economic historians have reviewed the effect on Germany's economy
and political drama since then, like Holtfrerich (The German Inflation,
1986) and Japres, (The Reichsbank and Public Finance in Germany:
1924-1933, 1985). David Marsh ("Don't Count on Germany's Surrender",
FT 21 June, 2012) refers to the 1968 refusal of Germany to cooperate
with an earlier crisis in Europe by devaluing the Mark. However,
current conditions appear more consonant with the period after the
Versailles treaty than at any other in European history.
The conditions placed on Germany at the end of WWI required the
nation to pay the victors for the cost of the war. Some economists
(see Albrecht Ritschl, 1996, for a review) have argued that Germany's
reparation payments helped stabilize the French post-WWI economy until
U.S. President Herbert Hoover finally was able to intervene with a
rational negotiated settlement and moratorium in mid-1931. The damage
done to the German economy and its development potential was enormous.
We might also realize that one repercussion was the election of the
Bruning administration what attempted to balance the budget by means of
inflation (as American economist Rogoff proposes:
Bruning also targeted the Weimar Republic's welfare state which was
really a product of the cunning domestic policies of Bismark. These
same ideas are at the foundation of today's proposals, especially
austerity and the reduction of the social programs of many EU states.
This is not a road that has a happy ending and we should avoid it at
Proposals to have the ECB bond government bonds or send funds
directly to the banks is also likely to fail as the end result of both
is to just continue the lives of already Zombie banks and their
mistaken policies. Rather the EU should fund massive employment
projects and education to put people to work and stimulate consumption
and investment. That ending will eventually put money in the banks,
but it will come directly from the people and not the government.