€ view: the German fear of inflation


If one talks about the German opposition against bond purchases by the ECB, the historical events of the 1920s are always mentioned as a central reason for the scepticism from Berlin. According to this narrative, the almost hysterical fear stems from the experience of the German middle class having lost its savings twice through hyperinflation in the first half of the past century. Both times, inflation was brought about by governments using the printing press to finance their expenses. As this traumatic experience lives on stories passed on from generation to generation, young Germans still have a fear of inflation far greater than young Italians, young Frenchmen or young Americans.

Of course, this is a very nice, plausible and graphic story – something rare in explaining economics to the broader public. If it is presented in the media, there are interesting pictures of people using packets of bills to fire their heating stoves or children playing with bricks of money instead of toys.

However, if one looks more closely into history and survey data, this story becomes less and less convincing.

The first question has recently been raised by some journalists: Why is it that Germany’s collective memory recalls the hyperinflation of the 1920s as traumatic, yet the banking crisis, Brüning’s austerity policy and the very high unemployment of the in the early 1930s seem to be forgotten? After all, one could even argue that the depression of the late 1920s hurt the German middle class much more than the hyperinflation of the early 1920s. The high unemployment of the early 1930s is repeatedly cited by historians as the key reason for Hitler’s rise to power, which as we all know has then led to the Second World War, in which the German middle class not only lost a significant share of its material possessions (including vast amounts of real estate in Eastern territories), but also the lives of thousands of sons, daughters, wives and husbands.

The second reason to be sceptical about the story of the collective memory of hyperinflation is historical data and polling data. When one follows the German debate today, one gets the impression that inflation over the past decade or so has been exceptionally high by German standards. When I asked a foreign journalist the other day what he thinks German inflation was during the time of the Bundesbank, he answered “slightly above one percent annually”. However, this is far from the truth. From 1960 to 1999, average annual inflation in Germany under the reign of the Bundesbank was 3.2%. From 2000 to 2010, when the ECB had taken over, it was 1.5%. Yet, there is little memory of the Bundesbank being criticised for running an overly lax monetary policy, but a lot of criticism of the ECB.

Moreover, if one looks at polling data, the fear of inflation seems to have increased over the past 20 years, just when actual trend inflation has declined (see chart below for the empirical relationship between actual inflation and the fear of inflation in Germany). The R+V insurance company polls a few thousand Germans every year, and asks for their most pressing fears. The data for this year seems to confirm the proverbial German fear of inflation: Inflation tops the list, with 63% mentioning it in 2011, far ahead of natural disasters, terrorism, becoming seriously ill or a deterioration of the economic situation. Yet, if one goes back in time, there are some interesting developments: In 1991, when inflation was running at 4% in Germany, only a third of Germans polled actually listed inflation as a grave concern. Only later, the fear of inflation become more important and made it to the top of the list. If fear of inflation were the result from experiences in the 1920s, it would be very difficult to explain why it has grown worse with the passage of time.

So, why then are Germans so inflation-adverse? Interestingly, fear of inflation increased just at a time when nominal wages in Germany began to stagnate or even to fall for a significant share of the population. My guess would be that in prior decades, people did not care much about moderate price increases so long as their wages increased by more than consumer prices. Once wages stopped increasing, any increase in prices started to eat directly into real wages.

For the current euro crisis, this means that German attitudes might not be as hard-wired as might be thought. A shift in German wage policies might also lead to more benign neglect towards moderate price increases among the German population and hence ultimately among German policy makers. Yet, even this might take more time than we have at hand to solve the current crisis.


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