The German Undervaluation Regime under Bretton Woods

How Germany Became the Nightmare of the World Economy

by Martin Höpner (Max Planck Institute for the Study of Societies)

Highly recommended longer PDF. Here is the teaser:

Abstract

Germany is an undervaluation regime, a regime that steers economic behavior towards deterioration of the real exchange rate and thereby towards export surpluses. This regime has brought the eurozone to the brink of collapse. But it is much older than the euro. It was established during the Bretton Woods years and has survived all subsequent European currency orders. The regime operates in two steps: competitive disinflation against trading partners; and resistance against correcting revaluations. The Bretton Woods order provided perfect conditions for the establishment and perpetuation of the regime: it was flexible enough for sufficient macroeconomic policy autonomy to bring about differential inflation rates, and sticky enough to delay and minimize revaluations.

Conclusion

Germany’s competitive undervaluation has brought the eurozone to the brink of collapse (Flassbeck and Lapavitsas 2015). This undervaluation did and does not just rely on “wrong” policy choices. It must be understood as a path prescribed by a set of institutions, organizations, and ideologies – in short, a regime – that is much older than the euro. It was established in the 1950s, long before Germany became an export-driven growth model in the sense of Baccaro and Pontusson (2016; 2018; 2019), and has survived all subsequent European currency orders. The regime relies on the minimization of inflation drivers and on the stickiness of the currency regime. The stickier the currency regime, the more likely it is that competitive disinflation succeeds. The euro is the first European currency regime that rules out de- and revaluations entirely. The radicalization of the German undervaluation regime under the euro should therefore not come as a surprise.

Admittedly, the fact that the German undervaluation regime already existed in the 1950s is not proof that Bretton Woods was its starting point. It may have been established much earlier and revived after World War II. Let us therefore briefly sound out

the earlier phases of German capitalism. To put the main finding upfront, trade balance data for Imperial Germany, for the Weimar Republic, and for Nazi Germany indicate that Germany was not a surplus country before World War II (see the data shown in Lampe and Wolf 2015, 282; Metz 2015, 197; Wolf 2015, 296; Tooze 2008, 688). We have good reasons to believe that the regime was actually established under Bretton Woods.

Imperial Germany’s trade balance was consistently in the negative. The Weimar years are particularly interesting. Under the gold standard, after the great inflation in 1923, Germany continuously lost competitive strength and accumulated trade deficits (James 2012). Weimar Germany was definitely not an undervaluation regime – although it would have needed to become one to be able to pay the World War I reparations (Holtfrerich 2016, 358). The first years in which Weimar Germany’s current account deficits changed into surpluses were the years of Reich Chancellor Brüning (in office: 1930–1932) and the surpluses were a result of the huge contraction of the economy rather than of undervaluation. These incidents resemble not Germany’s undervaluation regime but, to the contrary, the situation which the Southern European economies face today (Ritschl 2012). The data for the Third Reich are difficult to read. The main characteristic of Nazi economic policy was surely not to boost exports but to implement a strict dominance of domestic over foreign economic policy goals, and to use available resources for war preparation and, later, war. In general, the Nazi’s economic vision was economic autarky rather than reviving the external trade that had broken down during the 1929 crisis (James 1998, 71; Kopper 2016, 94).

Today, the world economy, and the eurozone in particular, experience Germany’s export surplus orientation as a nightmare. We have seen that this orientation has a history of almost seventy years and that it is deeply rooted in Germany’s political–economic institutions, organizations, and economic ideologies. Should this rather theoretic insight change our thinking about the euro crisis? Does it qualify, justify or excuse the damage done? Does it challenge the fundamental truth that currency unions can, always and everywhere, work smoothly only if they are at the same time inflation unions? Or, more practically, does it speak against a progressive political program that aims at breaking with Germany’s export surplus regime and at re-directing its orientations more towards the domestic economy?

Not at all; the political and practical implication is a different one. The insight into the historicity of the German undervaluation regime should shift our attention from the dysfunctional policies within the eurozone to the euro itself. Undervaluation regimes are beasts which must not be used to found currency unions unless hard, transformative instruments capable of breaking the regimes’ self-logics are available. As things stand, such instruments do not even exist in theory.54 This is the problem of the euro- zone, not the absence of a eurozone parliament, of a European finance minister, or of sufficient risk pools among investors or banks. All this does not imply that regimes can- not be transformed. But it opens our eyes to the fact that the common currency may be easier to break than the dysfunctional heterogeneity within it.

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