From day one Germany’s response to the financial crisis has been austerity as opposed to the American plan of stimulus. It is becoming more and more clear that stimulus is the correct way out of this crisis (once again Keynes was correct) but Germany is still intent on using austerity. As Paul Krugman has recently pointed out this is partly due to the fact that in the 1990’s austerity worked for the German economy. However, he also says it is partially to do with politics. The Germans are upset at the fiscal irresponsibility of countries like Greece and the Germans want to punish those countries.
I wish Germany though would look back at its own history. After World War 1 England and other European countries imposed harsh austerity measures on Germany, which caused among other things devastating hyperinflation. These measures were put on Germany even though Keynes, a leading economist of the time, strongly advised against it. He argued that imposing such harsh measures would lead to a ruined economy. However, England was more concerned with punishing Germany. So they went through with the sanctions and as Keynes predicted the German economy went into a free-fall. It was the failing economy that gave way to the rise of Hitler and the Nazi Party.
Now, I am not saying there will be a Greek Nazi Party but history does show austerity being used as punishment does not lead to a positive result. Austerity is not always wrong and can be used successfully. This tends to be more in times of economic growth not during downturns in the economy. The European economy is in a slump right now and if austerity continues to be used as punishment under the guise of an economic solution then history shows the economy will not recover. In reality the economy could become much worse. Germany should learn from its history to realize austerity as punishment has detrimental consequences.