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Germany's hardline attitude is making the situation in Europe worse

It is becoming increasingly obvious that while it might be morally right that countries put their own house in order and private investors take a loss on their loans, Germany's hardline attitude is making the situation worse
German flag
Germany's post-war debts were forgiven. Photograph: Alamy

As Italy finds itself in the same ante-room to bankruptcy already used by Greece, Ireland and Portgual, so the spotlight falls back on Germany and the Berlin government's adoption of the moral high ground.

Let them all go to the wall, appears to be the message from Angela Merkel's team. If they cannot live within the new rules on spending cuts and labour market reforms then they must live without EU money. Without EU money, as we know, there is no future because private investors demand an ever higher price for their support in the form of unaffordable interest payments.

There are many observers who argue German thinking is forgivable, trapped as it is by fears of a return to 1920s style hyper-inflation. Lending money freely to already indebted nations worsens the mismatch between demand and supply and triggers inflation. This century also had its lessons in the ravages caused by loose credit rules.

And if these reasons were not enough for imposing austerity, there is Berlin's fear as a creditor and losing the money lent over the last decade to the peripheral nations. Take a tough stance, say MPs in the Bundestag, send in the bailiffs and recover as much money as you can.

But the sight of Silvio Berlusconi's government teetering on the edge of collapse and opinion polls showing a third of Italians would welcome a return to authoritarian government should make the Germans stop and think.

What is all this moral grandstanding supposed to achieve when it is becoming increasingly obvious that while it might be morally right that countries put their own house in order and private investors take a financial loss on their loans, it is a policy that makes the situation worse.

Right or wrong, indebted countries cannot stand this level of punishment for past borrowing without internal political collapse. It is happening in Greece and the same instability could visit Italy soon.

Even if they find a way to maintain stable government, these countries cannot afford to stay in the euro because more austerity brings lower growth. Without growth they cannot afford to borrow from the private markets.

Fears of inflation are also misplaced. In a world that is frantically cutting its borrowing and anxiously saving, the problem is a lack of demand, as the International Monetary Fund boss Christine Lagarde pointed out yesterday.

Albrecht Ritschl, an economics professor at the London School of Economics, argues the Germans have no claim on the higher moral ground.

He points out that Germany ran up the largest debts of any nation during the 20th century in pursuit of its ambitions and was forgiven almost all of them.

Two post-war deals, one in 1948 and another in 1953 wrote off most of Germany's debts from the two world wars and 1930s depression and delayed the remainder for almost 40 years.

In 1990, when war loans were on the agenda again, the newly reconstituted German nation said it had no relationship with Imperial Germany of the 1920s, 1930s, and 1940s and therefore owed nothing. An agreement with the US and UK allowed Germany to wriggle free with a near 100% haircut on the last debts. Last year year it paid the last tiny amounts of leftover war loan

According to Ritschl, Germany in 1953 was "like Argentina on steroids".

There is a history in Germany of high debts and not knowing what to do about them, which means it cannot lecture other countries without denying its past.

Ritschl's history lesson is that the post war allied powers learned the lesson of 1919 and the failure of reparations when they wrote off almost all Germany's debts. It allowed Berlin to re-invent itself.

If the German people are content to see the break-up of the euro, then the current policies are well targeted. If, on the other hand, the idea is to keep the currency club together, it is misguided on every level.

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