THE CASH FOUNTAINS OF VERSAILLES

Niall Ferguson argues that Germany

in bearing the cost of European union is still paying reparations

THE 1 ERMATH of the ERM's col- lapse recalls Humpty Dumpty. All M. Delors' horses and all M. Delors' men are struggling to put the ERM — and, for that matter, the Treaty of Maastricht — back together again. Even Mr Major has arrived on the scene of Humpty's great fall, disin- genuously proffering Elastoplast in the form of his 'hard ecu' (or 13th currency) scheme. But all is in vain, for Humpty can- not and will not be reassembled.

The reason for this has nothing to do with those shirt-sleeved foreign exchange dealers who are widely held to have pushed Humpty off his perch. It does not even have much to do with the Mr Helmut Schlesinger of the Bundesbank, the other prime suspect. In fact, the key to the ERM's demise is an unexpected spectre from the past: the spectre of reparations.

It was the French journal Le Figaro that first pointed out that the Treaty of Maas- tricht was 'like the Treaty of Versailles only without the war'; meaning that Maas- tricht demands sacrifices of Germany tan- tamount to a new reparations bill. Most German commentators, though, have regarded this as 'going too far'. After all, reparations as conceived at Versailles placed an immense financial burden on Germany, totalling (according to the Lon- don schedule of 1921) 132 billion marks. Reparations destabilised the European economy and poisoned Franco-German relations, ensuring that the peace of Ver- sailles lasted only two decades. What pos- sible connection could there be between those bad old days and the brave, new Europe of Maastricht?

Yet the parallel with Versailles is not as far-fetched as it seems. Since 1958, the German net contribution to the EEC has totalled DM163.4 billion. This is around 30 billion marks more than the 1921 repara- tions bill. The striking point, however, is that hardly any of the 1921 reparations were paid: at most 20 billion marks before the system collapsed in 1932; and much of that was paid for by foreign investors who lost billions in the inflation of 1923 and the banking crisis of 1931. By comparison, not only have German 'reparations' to the EEC continued for 35 years, the annual burden has increased. Germany's annual net payment has trebled in the past decade, and is now DM21.6 billion.

On top of that is the cost of propping up the ERM. For all the blame heaped on it, the Bundesbank spent DM67 billion on the franc in the week before the collapse of the ERM. It also became lender of last resort to the Bank of France. Official fig- ures reveal that the Bank of France spent DM30 billion of foreign currency defend- ing the franc before Vendredi Noir, leaving just DM3.6 billion to withstand the specu- lators' final onslaught. That means most of the estimated DM60 billion it spent on the day of reckoning itself was borrowed, mostly from the Bundesbank.

And there is more. The total of post-war `unrequited transfers' from the German government to foreign countries amounts to no less than DM379.8 billion. Of that, just 17.4 per cent is accounted for by offi- cial reparations payments such as German payments to Israel and compensation to victims of the Third Reich, and these have now dwindled to insignificance. Besides the EEC contribution, real 'reparations' include contributions to other internation- al organisations; aid to developing coun- tries; and, most recently, aid to the former Soviet bloc. The sum transferred abroad in these ways amounted to 1.8 per cent of GDP in 1991 — almost exactly the propor- tion accounted for annually by reparations under the Dawes and Young Plans.

What has brought the issue to a head has been German reunification, because of the immense strain it has put on Ger- `I've got to steal a car to take my test again.' man finances. The collapse of the East German economy has made a nonsense of a system whereby Germany pays DM22 bil- lion a year to the rest of western Europe, and DM16 billion to the rest of the world. The annual cost of rebuilding the east Ger- man economy has been around DM180 bil- lion; the total public sector deficit this year will exceed DM110 billion. The economic implication is clear. Germany can no longer afford to be Europe's 'paymaster'. The wall on which the ERM Humpty Dumpty was sitting was the Berlin Wall.

This is the essential background to the ERM crisis. The Bundesbank may have delivered the decisive shove, but the willing accomplice must have been the German government. For, although the Bundesbank is formally independent, the Kohl govern- ment knows how to overrule the gnomes of Frankfurt when necessary (as over German monetary union in 1990).

Consider the German government's actions during the recent crisis. When M. Balladur proposed German interest rates be reduced, he was rebuffed. When M. Delors proposed the mark leave the ERM, to leave relations between the other cur- rencies unaltered, he was ignored. Theo Waigel, the Bavarian Finance Minister, sneered with Teutonic contempt at M. Delors' bed-ridden intervention. He described the 15 per cent 'elastic' bands introduced last week as a Befreiungsschlag — 'a blow for freedom'. Small wonder the two German EEC Commissioners decided not to accept M. Delors' invitation to Brus- sels last Saturday. Small wonder that we now hear Chancellor Kohl questioning the Maastricht timetable for monetary union.

To the French, it may seem like the end of the Franco-German axis which has been the key to French foreign policy since de Gaulle and Adenauer. Yet from a German standpoint this 'special relationship' with Paris faded some time ago. Chancellor Kohl, it is true, has kept up the Euro- rhetoric, insisting that German reunifica- tion was merely the prelude to European unification. But the feeling has been grow- ing, as the editor of the Bayem-Kurier, Wil- fried Scharnagl, puts it, that Kohl has `played the European card' too uncondi- tionally, for too long; and that Waigel introduced a long-overdue note of self- interest during the ERM crisis.

In part, disillusionment with Maastricht relates to what has been called `deutschmark patriotism'. The tabloid Bild Zeitung has waged a year-long campaign against the idea of European monetary union, denouncing the idea of 'esperanto money', and warning of the dangers of higher inflation if the Bundesbank is replaced by some kind of 'Eurofed'. 'The German's favourite reading matter is his savings book,' says Scharnagl: the memory of two hyperinflations in the space of 50 years makes the Germans uniquely wary of `monetary experiments'. But it does not take a degree in economics to know that

monetary disasters usually have their roots in fiscal deficits; and there clearly has been a direct link between post-unification pub- lic sector borrowing and the growth of the German money supply. Indeed, if it had not been for the Bundesbank's much criti- cised interest rate hikes, German inflation today would be higher still: perhaps 10 per cent instead of just 4.3 per cent.

The logic of reducing Germany's contri- butions to the EEC — to compensate for its contributions to the ex-GDR — there- fore seems inescapable. But how is this to be done? Professor Joseph Kaiser of the University of Freiburg points out that Ger- many is not only overburdened financially in the EEC, it is also under-represented politically in the European parliament, whose powers the Maastricht Treaty envis- ages extending, as well as on the Council of Ministers and on the Commission. A structural majority of net recipients can, it seems, vote with impunity for higher Ger- man contributions. 'No taxation with rep- resentation', suggests Professor Kaiser, could serve as the slogan for a German revolt against the treaty.

Is revolt too strong a word? German dis- enchantment with Europe should not be exaggerated. Kaiser's solution to the con- stitutional problems raised by Maastricht is more, not less, political integration: few critics of the treaty are willing to risk being accused of anti-Europeanism and, by implication, old-style German nationalism. And most Germans continue to regard the EEC as an economic necessity, since more than half Germany's exports go to the Community. Only a few dissenters, like the economic historian Werner Abelshauser, take the view that the EEC has distorted the pattern of German trade, and has favoured backward sectors like agriculture and heavy industry. Does Germany need to pay DM22 billion a year to secure its share of the Common Market?

What this means is not a German revolt against the Community itself, but a reac- tion against the French vision of Europe embodied in the Treaty of Maastricht. Which brings us back to Versailles, an ear- lier French vision. In The Economic Conse- quences of the Peace, Keynes predicted that reparations would lead to economic chaos and a deepening of wartime enmities. Sure enough, the succeeding four years wit- nessed extreme currency instability and continued Franco-German antagonism. The modern architects of European Union are frequently heard to say that they have learnt the lessons of history. But after more than a year of currency instability and recent Franco-German ructions, there is not much sign of it. Not for the first time, the recipients of reparations have unwittingly brought about the very thing they set out to prevent: a German revanche — or should I say Befreiungsschlag.

Niall Ferguson is a fellow and tutor in mod- em history at Jesus College, Oxford.