Eurozone crisis signals a repeat of the 1930s

The European crisis seems unprecedented but it is not. This time it centres on the euro, a currency used by 17 European nations. Last time, it centred on gold, an international currency used by even more countries.

Oh, and did I mention? The last time this kind of crisis occurred was 1931 — two years into the economic slump we now know as the Great Depression.

Let us hope we have learned something in the last 81 years. The evidence, however, suggests that we have not.

Then, as now, the watchword among the major world economies was fiscal restraint. Government deficits were up in Canada, the United States and Europe. The overwhelming orthodoxy, then as now, was that these deficits had to be cut.

The second overwhelming orthodoxy of 1931 was adherence to the gold standard. In effect, gold was the world’s currency. Individual nations pegged their own domestic currencies to the precious metal at a fixed price.

To allow that price to vary was heresy. To exit the gold standard entirely was unthinkable.

Flash forward to 2012. Mercifully, countries such as Canada, the U.S. China and Australia are not wedded to an inflexible multinational currency. But most of Europe is.

The U.S. can devalue its currency to boost exports and create jobs at home. In fact, it has cunningly done so — which is why its dollar has dropped in comparison to the Canadian loonie.

But eurozone countries like Spain and Greece cannot export their way out of recession by devaluation. They are stuck with the euro, a transnational currency that in terms of their economic needs is worth too much.

Even worse, they are being told they must slash wages and jobs if they wish to keep that common currency.

Understandably, the inhabitants of these hard-hit countries are loath to exit the security of the eurozone. But they are even more unwilling to pay the price of membership.

Something will have to give. As in 1931 what will almost certainly give is allegiance to an abstract monetary principle.

Faced with a stark choice, people will simply not agree to have their lives destroyed to protect the common European currency.

That is the meaning of this month’s Greek elections in which anti-austerity parties captured 60 per cent of the popular vote.

So yes, the euro as it exists now is surely finished. Just as, in 1931, the gold standard was finished.

Britain went off the gold standard “temporarily” in September of that year and never returned. Altogether, some 25 nations followed suit.

The events of 1931 were wrenching. A banking crisis enveloped Europe, in part because financial institutions found themselves holding government debt that was effectively worthless.

The prevailing wisdom then was that European countries in trouble had to find their own way out of the mess. The prevailing wisdom now, as articulated by U.S. Treasury Secretary Timothy Geithner (and echoed this week by Canadian Finance Minister Jim Flaherty) is that Europe must solve its problems with little or no help from the rest of the world.

It was a short-sighted prescription in 1931. It is equally myopic now.

The international economy is set to go over the cliff. Greece has called the eurozone’s bluff. One of the world’s major currencies is at risk. Too many financial institutions hold murky assets that may come apart as the euro unravels.

We need not relive the lost decade of the 1930s. But unless we heed the lessons of that period by preparing for an orderly wind-up of the euro, we are in danger of heading down a similarly bleak road.

Original Article
Source: Star
Author: Thomas Walkom