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Europe's Second Versailles Moment

Updated on August 27, 2012

The First Versailles Moment

The Weimar Republic Analogy

In analysing how the European Debt Crisis will be resolved, some commentators have drawn on historical precedents. There has been a tendency to default to the precedent set by the Weimar Republic of Germany. The scenario of an indebted democracy, trying to find ways of meeting foreign demands for debt payments, seems appropriate when analysing the Peripheral European countries.

Some observers have said that this kind of analysis is flawed; because it ingores the fact that the current European Debt Crisis is set against the background of a common currency. If one however considers that in the days of the Weimar Republic the common international currency between nations was Gold, then one can counter this criticism; and apply the same Weimar analogy. The fact that today the Gold price has risen and many are talking of it as a real alternative currency, only helps to strengthen the analogy.

The Second Versailles Moment

The Issue of Reparations

The strongest hint that the Weimar Republic analogy should be used today actually came from Germany itself. Professor Dr. Kurt Lauk, President of the Christian Democratic Union's Economic Council, suggested that:

Chancellor Angela Merkel will have to drop her resistance to pooling European debt and look toward the 1919 Treaty of Versailles as inspiration for a payment plan, according to the head of her party’s business caucus.

“We have to find something equivalent for the European debt situation,” Lauk said today by phone from Stuttgart, adding that Merkel will have to agree to a debt-sharing arrangement to save the euro. “The German government will move before the European monetary union hits the wall.”

When German political leaders themselves use contemporary analogies that draw upon this period in history, one can conclude that Germany and ideed the World has not progressed very far from this period. There are other signals from Germany, that actions are following words in this context.

If this indeed is the case, then the auspices are very ominous.

Gold Reparations

A run on the Gold Reserves of European Peripheral Nations
A run on the Gold Reserves of European Peripheral Nations | Source

The European Redemption Pact

Germany has proposed a European Redemption Pact, which involves indebted nations pledging their Gold Reserves in return for financial support. In effect, this means that these nations are parting with hard currency in return for support in a weaker currency known as the Euro. The lending nations get to replace some of their weak Euros with Gold. Given that this aid comes against further pledges of austerity from the bailed out nations, it is hard to see that they will ever be in a position of economic strength; to pay back the aid and get their pledged Gold back. The strategy therefore resembles a scheme to remove the Gold Reserves from the Peripheral Nations, so that they have no choice other than to accept political and fiscal union on unfavourable terms. The situation in the Peripheral Nations is therefore the same as that of the ill-fated Weimar Republic.

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    • KeySignals profile image
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      Crowdsourcerer 4 years ago from Dubai

      Chris, thanks for that objective view. I sense your heart would like it to work but your logic tells you that it won't.

    • CHRIS57 profile image

      CHRIS57 4 years ago from Northern Germany

      The Eurozone will hold together or break apart? Good question, next question.

      Either way it will be expensive for the lender countries. There is lots of rant about the economic issues, so i skip that and try a prediction from a more political standpoint.

      Currently Germany tries to take the lead in forming a political union of the Eurozone or better of the whole EU. The reason is simple. Impose same ways of running a country that apparently seem successful for Northern Europe. This attempt will fail - and with it the future of the Euro.

      The European Union is a bunch of independent, sovereign countries who only have in common the same continent and part of their history in good or bad times. French speak French, Germans speak German, .. i dont have to continue. National pride, national humiliation, cultural differences are what make up the European patchwork blanket of today. It is difficult to believe that a political union will be possible under these circumstances. So my prediction is: The Euro will fail.

      That is a pity, because the Eurozone in total is not doing bad. All baseline economic figures are more promising than those of the US or UK.

    • KeySignals profile image
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      Crowdsourcerer 4 years ago from Dubai

      Thanks for the analysis Chris. I have to ask you therefore; if you think that the Eurozone will hold together or break apart?

    • CHRIS57 profile image

      CHRIS57 4 years ago from Northern Germany

      Spain is almost in the same mess as Greece is in. Just look at the accumulated current account deficit. Spain is playing in the same league as the US or UK, only difference is that Spain has no sovereign currency to counteract competitivity lag.

      Italy is a little different. Italy contains in itself the same productivity gaps as the whole of the Eurozone has. Northern Italy is very productive and competitive, Southern Italy is not. Overall Italy runs significantly lower current account deficits than Spain or Greece. Also public debt has increased marginally over the past 10 years (from 110 to 120 % of GDP, i suppose), i would call that close to stability. Only recently the Euro betting of the money market made life miserable for Italy. In general Italy is now suffering from deficit sins commited long time ago, even before the Berlusconi aera.

      I refer to the current acount balance, because IMHO this is the only way to find out if an economy in total is living beyond its means or not.

      While we are at it, Ireland is best in class. The Irish government and taxpayer only swallowed the bank leverage sins of Euroland and did the lender economies a favour. The Irish real economy is in good shape, there is not much to restructure. Ireland definetively does not belong to "Club Med".

      Portugal is same size as Greece but picks up the responsibility check and restructures.

      Euroland as a whole is doing much better that the US or UK for the matter. If only there were not the gaps in productivity distribution.

      All this is written from an academic, macroeconomic position. People are suffering in the countries addressed. We should not forget that. It is real life here and now, no analogy to history.

    • KeySignals profile image
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      Crowdsourcerer 4 years ago from Dubai

      Hi Chris. Greece is a special case; what do you make of Italy and Spain?Especially Italy, since it has a lot of Gold and an unelected Prime Minister.

    • CHRIS57 profile image

      CHRIS57 4 years ago from Northern Germany

      It may seem popular to compare the post WWI situation with the Euro crisis of today. But i believe the analogy is wrong. Let me try to explain:

      The Euro crisis can be boiled down to a crisis of productivity gaps between Northern Europe and Southern Europe. The lender countries are more productive, more competitive than the borrower countries, simple as it is. It takes an awful lot of Greek olives to buy one BMW. What does this have to do with the early Weimar and post WWI period? Nothing, to be frank. After WWI the suffering came from war debt imposed on Germany, not from a competitivity gap between Germany and lets say France or the UK.

      There are literally no German people alive, who can remember and reflect the time of hyperinflation in 1922. But almost every German of today has some private pension fund (Riester Rente), some capital life insurance, some "Sparbuch" money. The crisis of the Euro puts all these assets in joepardy. The German sentiment comes from this immediate feeling, not from ancient historic legends of hyperinflation. Somehow the average people in Northern Europe have a more accurate perception of the situation that outspoken politians.

      A little thought experiment: What if you make an overall debt reset, set all sovereign debt to zero? If you would have done it in 1922, indebted Germany would have immediately progressed and prospered.

      If you do that today, from day one on a debt freed economy like Greece would fall back into debt habits. Why? Because Greece (with the Euro currency) is not competitive on the world market.

      However, from the perspective of indebted economies analogies may be seen .

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