On 27 February 1953, at the conclusion of a year of work at the London Conference on the German external debt, Italy, along with 15 other countries, forgave half of Germany's debts that the latter had contracted between 1919 and 1945. The payment of the other half, equal to 16 billion marks, was deferred over the following thirty years. As a further courtesy to those who had always caused two world wars, it was established that the annual refunds would never exceed 3 percent of German exports and would be suspended if Germany found itself in commercial deficit. These provisions gave creditors a strong incentive to buy German products and decisively accelerated the reconstruction of the western part of the country.
As for WWII reparations, it was decided to defer payment to German unification, which in February 1953, with Stalin still alive, seemed an impossible event. When unification happened unexpectedly in 1990, the debt was almost completely cancelled. 239 million symbolic marks remained and these too were deferred over twenty years, so much so that Germany finished paying in 2010.
German historical memory, like everyone else's, is selective. He remembers certain things and tries to forget others. Among the things that Germany reluctantly remembers we want to mention two.
The first is that the attitude of the Troika of creditors United States-Britain-France, which supervised the German economy from 1919 to the first phase of the Cold War (with the exception of the 13 years of Nazism), was always decisive, for better or for worse, in directing the fate of German history. When the Troika was harsh and vengeful, Germany duly fell into chaos and exported it to the world. But when it was enlightened, Germany flourished again in an instant.
You consideri the history of the Weimar republic, which is often remembered as a single one and which was instead divided into three completely different phases. The first, from Versailles to hyperinflation (1919-1923), saw a very harsh Troika and coincided not by chance with an infinite series of insurrectionary coup attempts by right and extreme left (the latter with the risk of welding with the revolutionary Russia that would change the history of Europe). When the Reichsbank, following the proto-Keynesian suggestions of Chartalism, tried to ease the woes of the exhausted population by printing unlimited money, the ensuing inflation further reduced Germany's ability to service its foreign debt.
In a jolt of intelligence the Troika took note of the situation and drastically reduced his calls for austerity. Coupled with the instantaneous end of hyperinflation this produced the second Weimar phase (1924-1929), the luminous Goldene Zwanzigers of frenzied recovery, extreme political and intellectual vivacity, and radical modernism that we still admire today.
However, the light went out again from 1929 to 1933, when the American banks suddenly closed the credit taps and the Troika began to hammer Germany again to try to extract what it could. And so, while one by one everyone began to devalue their way out of the Great Depression, Germany was forced to maintain parity with gold, in order to make it less competitive and steal market share.
To remain competitive with a fixed exchange rate Germany then decided on an internal devaluation of 20 per cent, cutting public and private wages, pensions and social services equally. Since none
party wanted to take responsibility for these measures, Hindenburg called in the technician Brüning and formed a government of the president who, having zero votes in the Reichstag, governed exclusively by decree.
And here we come to the second point that German historical memory tries to forget, relative bad inflation and absolute bad deflation. Germany obsessively reminds itself and the world of the hyperinflation of 1923 and with it seeks to justify its monetary and fiscal sadomasochism of today. It almost suggests that Hitler came to power due to inflation, when the Nazis in the two elections of 1924, with their financial wealth completely destroyed, stopped at 3 percent (while the system parties were largely confirmed) and even went down to 2 percent in 1928. The Nazis exploded instead under Brüning's austerity and took over the Reichstag in 1933. While inflation had killed the lenders but at least done the borrowers a huge favor (mortgagers found themselves house as a gift), deflation had hit rich and poor, industrialists and workers, banks and depositors.
We talked about Germany, of course, to talk about Italy. The ghosts of Greek deflation and Argentine inflation hang in the air, of a Troika ready for a semi-colonial government to assault private wealth or of a leap in the dark out of the euro. We could be wrong, but at the moment the liveliness of the spread on the one hand and that of government spending projects on the other seem above all a great flexing of muscles and shaking of clubs to take the interlocutor's measures. And so the spread rises one day and falls the next day (facilitated in volatility by global liquidity which is starting to show the first signs of fatigue), while the government launches one trial balloon after another and alternates between fierce and mild tones and reasonable. Behind the scenes, however, we imagine a very tough negotiation already started on the three and something of a deficit on which, if desired, an agreement could be reached quickly if there were no faces to lose or save and voters to lose in Germany and gain in Italy and vice versa. .
No one, if reasonable, will want to go as far as breaking up anytime soon. The European elections in March could begin to change the face of the continent and give a robust minority to the anti-system forces. It might be better for the Italian government to wait to have softer counterparts in Europe and for the forces of the system it would be better not to go to the elections with a collapsing continental project.
But even after March 2019 it will remain to be seen whether denying 3 percent to Italy will really be worth the end of the euro (or one euro at 1.50 in time of duties for those who remain in it) and whether, on the Italian side, to settle than a 2.5 is worse than jumping into the void. After all, there are many other growth-promoting things that a government that talks about change could do, starting with deregulation, but we don't hear about it.
Waiting for the results of European negotiations that could go on for years, it's nice to see the positive tone of global stock exchanges. Not all that glitters is gold, however. There is a lot of closing out of overly short positions in bonds and overly long positions in oil which creates an optical effect of quiet bonds and calm inflation again. This effect will disappear in some time, but in the meantime it is perfectly legitimate to enjoy it.
With more relaxed Treasuries, the upward push on the dollar weakens. However, the Italian question will prevent a significant recovery of the euro, which in our hypothesis, will not be resolved in the short term. Precisely for this reason, the ECB will go ahead with its Qe zero program, but it will be careful not to raise rates for much longer and will not even try to dismantle Qe as the Fed is doing.
