The German Monetary Trauma is Terrorizing the Eurozone

The German Monetary Trauma is Terrorising the Eurozone


De eurozone shows a level of unemployment, which is too high for a long period of time already (about 10% on average). When introducing the euro politicians limited the possibilities to implement adequate budget policies. From 2008 the eurozone faces a depression (not a recession). Since it means that monetary policies have become ineffective, there are no effective macroeconomic policies anymore to get out of the depression. By buying government bonds from financial institutions, which are in Draghi (ECB) makes the financial system more liquid. In an attempt to discourage the banks to hold their assets in cash, thereby encouraging them to lend credit to private consumers and investors, the refinancing rate of the ECB is even negative. It illustrates the despair of the monetary authorities: everyone is looking at the ECB, while the solution must be found through the implementation of an adequate budget policy. In this article we will show that irrationality of the powerful politicians and economists is the cause of all evil.

Anti-crisis policy

In the first years of the crisis monetary authorities were implementing policies on the basis of the monetary theory of Milton Friedman. His monetarism states that free-market economies are stable systems, so long as central banks increase the money supply in accordance to the structural needs of the economy – also in a recession. In this way a depression will be avoided. If it appears impossible to let the consumers and investors borrow from banks to finance their expenditures, the central bank should consider giving every person a fixed amount of money (helicopter money). The assumption is that the recipients will spend a large part of this money, thereby stimulating the economy.

His theory is on how to prevent a depression; not on how to tackle a depression. From 2008 onwards consumers and investors are economically depressed. They are pessimistic about the state of the economy over the next period of about 4-6 years. Small windfall gains are used to increase savings and to pay-off debts (‘balance depression). After eight years of depression, the eurozone has not recovered yet. Nevertheless the ruling politicians and economists stick to their Friedmanian diagnosis. We can concude that the Trojka policies are based on a true dogma.

What makes a statement to a dogma?

Neuroscientific rearch has shown that information that fits the knowledge structure, which has been stored already, is accepted without much consideration (Kahneman, 2011). Information that does not fit the stored knowledge structures, which are stored, is not easily accepted, and might be rejected. A second result of this type of research shows that information is accepted or rejected group-wise. When we combine the two results, we get the following picture. A mind, which has stored a neoclassical knowledge structure over a long period of time, is not open to store the information that a price decrease is followed by a decrease in the quantity demanded. If this information is accompanied by many other relationships, which are improbable for a neoclassically structured mind, all the information might be rejected and not stored. In this way the structure that is stored will grow in strength. A person is a dogmatic person, if he is unwilling to take analyses, based on different knowledge structured, seriously. This unwillingness is the essence of irrationality. Now the question is what actually is the origin of such a stubbornness.

Irrationality in macroeconomics

In 1975 I accompanied a group of economics students on an excursion to a series of prestigious German organizations, among them the German central bank. We had the chance to have a discussion with a number of members of the Board; the topic was inflation. Quite soon we discovered that the meeting was not a confrontation between different views on inflation. Straight from the beginning they made us clear that inflation has serious disadvantages, en not any advantage. Listen to us – we are the the experts; end of discussion. This experience has had a deep impact upon me. Over time I have discovered that this is not only the dominating attitude outside the university – also our alma mater appears a social battlefield.

A few years ago our media regularly published interviews with German monetary experts. They wondered why other countries were opposing German policy views so strongly: ‘we cought a monetary trauma in 1923, and we want other countries to understand this. A strong increase in the amount of money in circulation leads to high inflation figures, and this impoverishes the middle class. We have learned our lessons’. Keizer (2015) has approached this trauma from a series of psychological perspectives. In all cases a trauma is a bad thing. But the Germans see their trauma as a good thing – which is a sign for really being traumatised; that is by being unwilling to extensively talk about monetary policies, viewed from different perspectives.


The neoclassical and monetarist analysis is about an economy, which is close to equilibrium. The analysis is about recession and recovery – not about depression. Keynes, however, made an analysis of a free-market economy in disequilibrium. Sometimes close to equilibrium, and in other times in depression. Unfortunately his work is not part of most the academic curricula in Europe. Keizer (2015) offers an extensive review of heterodox economics, including radical and post-Keynesian economics, social economics, behavioural ecnomics, evolutionary economics and the Austrian approach. In the current situation Keynes would advise governments of the eurozone to coordinate their decisions to increase investments in infrastructure. Especially economies with a surplus on the current account of their balance of payments should increase their investments. With respect to the way of financing these additional expenditures, we must look at the statistics on the excess supply on the capital market and on the amount of money in circulation. If the amount of money is hardly increasing or even decreasing, monetary financing of the additional investments is the most desirable way. If the excess supply on the capital market is large, issuance of bonds is the way of financing to be preferred. At the moment both sources are to be preferred – a comfortable position.

Political stalemate

The Germans want an increase of the interest rate – a return to its natural level, as they see it ( a typical Austrian position). The mediterranean countries, however, prefer a Keynesian approach. Actual policies are the result of a compromise: no Keynes, no Hayek, but Friedman. It means low interest rates and Quantitative Easing: the ECB goes on buying government bonds from countries, whose economies are in trouble.


My proposal is the implementation of an experiment. A group of German economists, who are educated in neoclassicism and in the teachings of the Austrian School. They follow a series of lectures in heterodox economics, given by mediterranean economists. In the end they are tested whether or not they have understood it. Mediterranean economists are invited to follow a series of lectures on neoclassicism and Austrianism, given by German teachers. Also these lectures end up with a test.

After these courses the German economists are asked to simulate the mediterranean position, and the mediterranean economists are asked to take the role of being German economists. In two days they should negotiate with each other and decide upon the eurozone policy to be implemented. After half a year they must meet each other again and evaluate the effects on their way of economic thinking.

The most important goal of this experiment is to make the brain structures of the economists more accessible for the opponent’s arguments. If so, it could make the process of future decision-making more rational.

Daniel Kahneman (2011), Thinking Fast and Slow, London: Penguin Group.

Piet Keizer (2015), Multidisciplinary Economics, Oxford: Oxford University Press.


Piet Keizer

Utrecht University School of Economics

29 March 2016.

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