Tuesday, 22 January 2013

Is Monti the new Brüning?

So, in yesterday's 'Financial Times' Wolfgang Münchau had an op-ed entitled 'Monti is not the right man to lead Italy'. There is a lot about this in the Italian press today. Münchau's piece is quite embarrassing for Monti, who presents himself as an economic expert who is trusted by the markets and the financial establishment. A vote of no confidence from one of Europe's brightest economic commentators does not fit well with that image.

Interestingly, Münchau concludes his comments with a historical comparison: 'As for Mr Monti, my best guess is that history will accord him a role similar to that played by Heinrich Brüning, Germany's chancellor from 1930 to 1932. He, too, was part of a prevailing establishment consensus that there was no alternative to austerity.' Also, Brüning was the last chancellor of the Weimar Republic with a more or less firm commitment to democracy. After him came the deluge. Given the notoriously precarious situation of the Italian political system this comparison is devastating. But is it also good history?

Until today historians are still not quite sure what to make of Brüning and his austerity policies. Was he the last man standing of the Weimar Republic who did the necessary thing and failed 'a hundred meteres before the finish line' (as he saw it himself)? Or did his stubborn insistence on mistaken policies make a bad economic crisis worse, thus contributing to the collapse of democracy? Let's look at three of the most influential ways of looking at Brüning:

First, there is the 'Helbich' Brüning. Wolfgang Helbich and other historians have argued that Brüning's main objective was to demonstrate that it was impossible for Germany to pay the reparations that had been imposed after the First World War. To this end he took a gamble: he imposed cuts on public expenditure to make sure that reparation payment could be met. He also applied other deflationary measures to make Germany's economy more competitive. This was necessary because a positive balance of trade guaranteed a sufficient influx of foreign currency which was needed to pay the reparations. He hoped that the western powers, mainly France and Britain, would eventually see that these policies of austerity was unsustainable and that they would agree to renegotiate the reparations. Just how important this line of reasoning was at the time has been questioned by other historians, but it did most likely play an important role.

So, does Monti look anything like the 'Helbich Brüning'? Not very much. Today's equivalent of Brüning's gamble would be to engage in tough austerity measures to demonstrate to 'the powers that be' (this time in Berlin rather than in Paris and London) that these policies do not work economically and create substantial political risks. But this has not been part of Monti's agenda. For Monti austerity is not part of a political ruse. He truly beliefs in it. This can also be seen in his attitude to German economic policy. Rather than exercising whatever political power he wields within Europe--and by virtue of its size, Italy does have considerably more political clout that say Greece or Portugal--to push the German government to ease its pressure abroad and, above all, behave in a less austere manner at home in order  to reduce Germany's advantage in competitiveness and provide some economic stimulus for the Eurozone. But instead of doing that, Monti has used his visits to Germany to point to areas where the competitiveness of the German economy can be improved. Rather than challenging the idea of austerity, he is trying to 'out-austere' the German government and position him as the true champion of austerity in Europe. That's not a lot like Brüning. At least not in the Helbich version. Perhaps, the European politician who comes closest to the 'Helbich Brüning' is Spain's Rajoy: his enthusiasm for austerity has been limited from the start and, as Münchau points out, Rajoy is calling for Berlin to increase its own government spending rather than leading Europe in austerity.

More about the two remaining versions of Brüning later. Now busy with other things. 

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