For a number of years now, Europe’s EMU has been seen skating along the abyss, suffering its worst economic crisis since WWII and flirting with outright deflation and/or breakup. The fragility of the euro currency union has been a cause of instability across Europe and beyond. The argument advanced in this paper assigns Germany a leading role in the tragedy of supposed virtues turning out to be vices that have brought Europe to its knees. It ascribes a critical weight to the “power of ideas,” particularly Germany’s oddly anti-Keynesian views on matters of macroeconomic policy. 

The ideas that brought wreckage to Europe have historical roots though: the success of the German model that was the basis of West Germany’s postwar “economic miracle,” its rise to prosperity and respectability, and eventual (re-)unification in 1990. Unfortunately, Germany has never fully understood the true sources of its success and learned the wrong lessons from its own economic history. 

A peculiar monetary mythology has been at play here that justified the Bundesbank’s stout anti-inflationary bias. This approach brought fame to the Bundesbank itself and German pride in the soundness of its Deutsch mark. Importantly, for a long time the Bundesbank’s distinctive brand, its bias against (hyper-)inflation, and Germany’s stability culture did not hinder but even supported German growth: export-led growth. For in the context of pegged nominal exchange rates, achieving a superior (lower) inflation record translates into competitiveness gains. In this way, (West) Germany learned to live quite well without Keynesian demand management. The Bundesbank’s real role was to enforce discipline—superior (“German”) discipline in the form of wage moderation and balanced budgets. Effectively, Germany took Keynes’s diagnosis of mercantilism in chapter 23 of the General Theory to heart, but ignored the remaining 23 chapters, thereby getting away with it by relying on others to do the real job.