Helmut Schmidt became chancellor of West Germany in the spring of 1974, shortly after Harold Wilson was re-elected as prime minister in the UK.
The two men took office at the worst possible time. Sharply rising oil prices had put an end to the postwar economic boom. Business costs were rising rapidly, profits were under pressure, jobs were being shed.
Yet West Germany and Britain had contrasting fortunes in the years that followed. In the UK, inflation hit a postwar peak of almost 27%, the pound came under savage attack on the foreign exchanges and the International Monetary Fund was called in.
West Germany emerged with its reputation as Europe’s economic powerhouse not merely unscathed but enhanced because the country showed it could cope even when the going got tough.
Schmidt was not chancellor during the years of the so-called Wirtschaftswunder – the economic miracle – that had transformed a country wrecked by the second world war.
In a sense, previous chancellors such as Konrad Adenauer, Ludwig Erhard and Schmidt’s immediate predecessor, Willy Brandt, had it much easier. They enjoyed the benefits of pent-up demand, the Marshall plan, debt relief and an undervalued currency during the 25 years in which West Germany was transformed from a country where the population was starving into the third biggest economy in the world.
Schmidt’s task was harder. The postwar Bretton Woods fixed exchange rate system had broken down, leaving currencies to find their own level. The mark had been rising fast in the years before Schmidt became chancellor, making life a lot harder for West German manufacturers.
His job was made both more difficult and easier by West Germany’s system of economic governance that put enormous power in the hands of the country’s central bank, the fiercely independent Bundesbank, which had responsibility for controlling inflation through the setting of interest rates and restrictions on the supply of money.
It was tougher because the Bundesbank could stymie any attempts by the West German government to boost demand and jobs by running bigger budget deficits – the policy pursued by Wilson in Britain.
The reason it also made his life easier was that the anti-inflation Bundesbank bias forced West Germany into alternative ways of making its imports more competitive. The chancellor used his influence with the trade unions to persuade West German workers to take cuts in their wages and living standards so that exports became cheaper.
West Germany, like every other developed western nation, suffered from lower growth, higher inflation and higher unemployment than had been the norm in the postwar “golden age”; but in relative terms Schmidt was able to boast of a better record than any of his contemporaries, Wilson and James Callaghan in Britain, Jimmy Carter in the US and Valéry Giscard D’Estaing in France.
This was a period that shaped West German thinking and the European project in three big ways.
Firstly, it reinforced the West German bias against inflation and deficit spending. Under pressure from the Americans, Schmidt agreed to a global reflationary package in 1978, but the experiment ran into a second wave of oil price increases and was speedily abandoned in West Germany.
Secondly, it persuaded Schmidt that steps had to be taken to prevent European currencies from gyrating against each other. He was instrumental in the creation of the European exchange rate mechanism that proved to be the forerunner of the single currency. This development chimed with Schmidt’s passionate belief in closer European ties.
Finally, it convinced the next generation of German policymakers, including Angela Merkel, that the way to solve economic problems was through sacrifice and hard work rather than devaluation, cheap credit or higher budget deficits.
