Albrecht Ritschl on the Marshall Plan, Greece, and the Eurozone

17 06 2012

Albrecht Ritschl, who is an economic historian at LSE, has published a great blog post comparing the help Germany has given to Greece in recent years with the financial assistance packages offered to Germany at various points in the 20th century (the Dawes Plan of 1924, the Young Plan of 1929, and the Marshall Plan of 1948). As we all know, German taxpayers have footed the lion’s share of the bill to assist Greece and other Eurozone countries. Defenders of this arrangement argue that the poorer Eurozone countries have a moral claim on Germany because the latter became rich as a result of Marshall Plan assistance from the United States. The use of this historical analogy has provoked widespread debate.

Poster promoting the Marshall Plan.

Ritschl’s blog post of yesterday was prompted by a 12 June  New York Times piece in which the economist Hans-Werner Sinn of the University of Munich invokes comparisons with the Marshall Plan to defend Germany’s position against Eurobonds, the pooling of sovereign debt within the euro zone. Sinn argued that Germany has given Greece vastly more than it was itself given by the United States.

Ritschl questions Sinn’s numbers, arguing that he has underestimated that amount of aid given to Germany under the Marshall Plan and has overestimated that amount of help Germany has given to Greece. According to Ritschl, the financial assistance packages given to Greece in recent years are more like the Dawes Plan of 1924 than the generous Marshall Plan of 1948.

Here is the key part of Ritschl’s piece:

Under the Dawes Plan of 1924, Germany’s currency had been put back on gold but Germany went on a borrowing binge. In a nutshell, Germany was like Greece [in the early 2000s] on steroids. To stop this, the Young Plan of 1929 made it riskier to lend to Germany, but the ensuing deflation and recession soon became self-defeating, ending in political chaos… As far as historical analogies go, what Southern Europe received when included in the euro zone was closer to a Dawes Plan. And just like in Germany in the 1920s, the Southern Europeans responded with a borrowing spree. In 2010 we didn’t serve them a Marshall Plan either, but a deflationary Young Plan instead. This latter-day Young Plan is not even fully implemented yet. But we see the same debilitating consequences its precursor had around 1930: technocratic governments, loss of democratic legitimacy, the rise of political fringe parties, and no end in sight to the financial and economic crisis engulfing these states, no matter how many additional aid packages are negotiated. Woe if those historical analogies bear out.

Hotel being built in West Berlin with Marshall Plan money, 1949. Note the number of sub-contractors (windows, wiring, etc) who were involved in this project.

Based on my limited reading in this area, I’m inclined to think that Ritschl has a better argument than Sinn. I understand the frustration many German taxpayers feel with Greece. Much more needs to be done if this currency union is going to work. (In fact, I’m not convinced that a currency union of territories in which different languages are spoken is compatible with democracy). However, I think that the attitude of much of the German populace towards Greece and other poorer parts of the EU suggests a distinct lack of awareness of and gratitude for the help Germany was given in its hour of need in the late 1940s. I note with interest that Professor Sinn was born on 7 March 1948, less than a month before President Truman signed the Marshall Plan into law.

The US law authorising the Marshall Plan.

The Eurozone Crisis and the Misleading Historical Analogy of the Austro-Hungarian Empire

15 05 2012

Right now, the attention of the financial world is focused on the political crisis in Greece, where there is every sign that the next government will reject the terms of the EU bailout, effectively pulling Greece out of the Euro and plunging the Eurozone into crisis. There has been a lot of commentary and analysis of the crisis in the press, but not enough of this analysis looks to history. The Euro isn’t the first currency union ever, so it worthwhile looking to see how past currency unions have operated.

With this in mind, I would like to bring your attention to an interesting new blog post by Richard Roberts, a financial historian who is also the Director of the Centre for Contemporary British History at King’s College London. His lengthy post, which was carried on the History & Policy blog, talks about the currency union that existed in the Austro-Hungarian Empire between 1867 and 1917.

Austro-Hungarian Banknote from 1880

Roberts reminds us that after the constitutional reforms of 1867, the Hapsburg Empire was made up of two sovereign governments that shared only a monarchy, army, diplomatic service, legal system and currency. Both Austria and Hungary had their own parliaments, governments and national debts. Robert’s is suggesting that the multinational Hapsburg Empire was, in a sense, a precursor of the modern Eurozone. Roberts examines precisely how this central bank of Austria-Hungary functioned and then concludes that “the case of Austria-Hungary demonstrates that a currency union between different states can last, and prove stable, over a sustained period”.

Richard Roberts

Roberts’s conclusion will doubtless cause some readers to feel a bit optimistic about the Euro’s chances of surviving. I’m not convinced that the historical analogy Roberts is making is actually much help in trying to understand the Eurozone. The Austro-Hungarian monetary union included just two fiscal units, Austria and Hungary, although there were many ethnic groups living in both units.

In contrast, the Eurozone includes a much larger number of nation-states, each with their own parliament, system of taxation, national debts, armies, etc. More importantly, the Hapsburg Empire wasn’t a democracy, which helped to make its adherence to the gold standard possible. As Barry Eichengreen has shown, one of the reasons so many 19th century Western nations choose to endure the rigorously deflationary monetary policies required by the gold standard was that they weren’t yet democracies: most male wage earners didn’t have the right to vote, which meant that the social classes most likely to be hurt by fiscal and monetary restraint (the poor) didn’t have much say in how their countries were governed. (Some Western countries did have universal male suffrage in this period, but found ways of diluting the political power of wage earners: for instance, Prussia gave extra votes to the wealthy).

Once universal adult suffrage coupled with competitive elections came along, it became politically impossible to sustain the gold standard. This is why most Western countries were politically unable to remain on the gold standard during the Great Depression of the early 1930s: by that point, workers and the poor, who would have suffered from the policies necessary to remain on gold, had acquired too much power. Since then, these groups have acquired even more political clout.

The situation was very different in Austria-Hungary.  Even in 1917, the Hapsburg Empire was still be run by a coalition of Austrian and Magyar aristocrats. It really can’t be compared to the Eurozone, which includes 17 social-democratic countries in which groups such as pensioners and public-sector workers have both the right to vote and actual political power.

European Central Bank, Frankfurt

I have a lot of respect for the scholarship of Richard Roberts. However, I think that in this case he needs to go back the drawing board and find a better historical analogy for understanding the Eurozone’s predicament.