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Ludwig Erhard’s lesson for Mrs. Merkel and Dr. Draghi

“Ludwig Erhard’s legacy in shaping Germany’s post-war recovery stretches far beyond his own country and far beyond his own times. His conception of the social market economy was visionary. And he even held cherished views about central bankers, stressing the importance of price stability: “Die soziale Marktwirtschaft ist ohne eine konsequente Politik der Preisstabilität nicht denkbar.” I think we cannot formulate this idea any better today.”  Mario Draghi, today, Ludwig Erhard (LE) Lecture, Berlin.

PS: unofficial translation of LE statement in English: “The social market economy without a consistent policy of price stability is not possible.”

True enough, Dr. Draghi, we all agree you can’t have a market economy without price stability. But the problem today is that we do have price stability but it is our our social market economy that seems to have disappeared.

It turns out that it is Ludwig Erhard (LE) himself, the father of the German post-WWII economic miracle, who had the solution for that problem. LE, we here add, was never a Keynesian. He believed the engine of growth came from reforms that opened markets. In his “Prosperity through competition” he confirms this view. But, as an intellectual leader that understood that each period of history has its specific situations and that orthodoxy is the enemy of effective solutions, he viewed recessions – just like Keynes- as special beasts that needed a different treatment.

In the “Medicine against recession” part of his book, LE recalls how the Germany of 1948 was saved through an array of economic policy measures from its recession, confirming – we quote – “that a modern market economy is without doubt in a position to meet a recession effectively without endangering the stability of the currency”. Now that is quite a complement to Dr. Draghi’s statement isn’t it?

Very interesting to note what were these measures used by Germany in the recession. Again, we use LE’s part of the book:

a) lower reserve requirements;

b) cut of the discount rate;

c) credit expansion of banks to firms.

Wow, quite interesting right? The same measures discussed by Dr. Draghi today for the euro area in his speech! But there is a difference with today: things did not end there, with expansive monetary policy! No, LE says that “the pressure of mass unemployment forced a further strengthening of expansionary policies”. And …. guess what these were of all things?

You would never guess. Maybe because it was Germany. Maybe because we never mention this anymore in the European debate, it is forbidden. Yes, now you might get it: expansionary fiscal policy. In the shape and form of:

a) “creation of public works programmes as well as help for building”,

b) “lower taxes … in order to step up consumption”.

Now, Mrs. Merkel: why have you forgotten Dr. Erhard’s lesson? Why?

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