After my guest blogger Henry Kaspar showed us some historical lessons from the Gold standard (if you come from Krugman, this is the correct link), Ryan Avent has more. In a remarkable post he compares Europe’s current problems to the history of the 1930s and the rise of the Nazi regime in Germany. And he does a good job at it, given the length of a blog post. He writes:
There is a striking irony to the current situation in the euro zone. It’s often assumed that hyperinflation gave the world the Nazis; that’s wrong.
Well, mostly wrong. In his earlier days and attempted coup d’état (in 1923), Hitler was in part exploiting the frustrations of Germans (Bavarians, actually, as he was only active in Munich), with the hyperinflation – brilliantly captured by Lion Feuchtwanger’s novel “Erfolg” (“Success”). But the Nazi rise to power came later, when Germany was struggling: politically, as an increasingly violent and heavily divided society made any compromise very difficult. And economically, as Ryan compactly summarizes as follows:
… [During the economic crises after 1929], Germany found itself squeezed on two sides. The economy was crushed by an intense cycle of deleveraging and austerity, as the government struggled to maintain market confidence. And pressure was also applied on the monetary side, as Germany battled to fight gold outflows and keep itself on the gold standard.
… As European economies like Austria and Germany failed, America, Britain and France scrambled to assemble aid packages that might prevent a collapse, but these negotiations were inevitably characterised by petty disagreements and myopia, and the resulting aid packages were always too small and came too late.
Eventually, the system failed entirely, countries began abandoning gold, reinflating, and spending heavily on an arms buildup. The back of the Depression was broken. But it was too late to save Europe from utter catastrophe.
Then Ryan’s post culminates in what can be interpreted as a heavy criticism of European economists that did not foresee that they were about to wreck the very project that the Euro was to be the crown of:
The European Union, and its single-currency extension, were forged in the decades following the war in an effort to make sure that war never again divided and savaged the continent. But strangely enough, in the effort to tie itself together, Europe imposed some of the same fiscal and monetary constraints that precipitated the collapse of the 1930s. And here we are, watching history repeat itself. Within a Europe riven by imbalances, the fiscal and monetary screws are once again being applied to countries with no hope of escaping their financial burdens. Markets are attacking, and efforts to salvage the situation through massive aid packages are emerging too small and late to matter. The pressure within the squeezed economies is building, and that pressure will find a release, one way or another. A Europe hoping never to repeat its historical tragedies has gone and blundered into institutions that make those same tragedies more likely. The European project, as it looks now, has failed. …
One has to feel sorry for Europe, in a way. It did its best to learn from history, hoping never to repeat it. But history is a long, complex course, and there’s always a chance that the lessons you miss are the most important ones.
This contains more truth than the average (or even not-so-average) European is willing to concede.
I have repeatedly argued that we are about to destroy the brilliant and historically unique political project that is Europe. But whenever I did, I was writing against fiscal integration, something that Ryan and others seem to see as the solution. So let us recap what a useful fiscal integration will imply: transfers from Germany to other countries. Period. Anyone who denies this is utterly naïve. What is more, we will make conditional transfers out of them, of the sort: money for reforms. Reforms, mind you, that these countries were politically unable to pull off because they are spectacularly unpopular. And here comes the kicker: some of these will be loans that need to be repaid, to an already unpopular creditor. Am I the only one who thinks that this is crazy?
As much as I share Ryan’s analysis, there are important differences to the 1930s and in those can we find a better plan for the future. The Euro is like the Gold standard, but not exactly the same. First, we have a central bank printing “gold”. That is not a minor difference, it is key: the ECB sets the overall European inflation target. With a more appropriate target, given the historical lessons for such a diverse monetary union, for instance an price level target with 4-5% inflation p.a. (or better yet: a nominal spending level target of 6-7%), this central bank could be a very important building block of a fairly successful currency union. What is more, this central bank could use its powers to conduct somewhat differentiated monetary policy and force governments into counter-cyclical fiscal and regulatory responses.
And since the European debt crises is to a great extent a banking crisis – otherwise Greece and Portugal would just default and conduct an IMF programme, and Ireland would have never been in trouble in the first place – we need a central and politically independent European banking regulation authority with almost unlimited powers. Tyler Cowen argues that this is the first step to a fiscal union if it contains an FDIC-like deposit insurance, and I partly agree. But if there ever was a reasonable argument for a fiscal union, it is here.
Unfortunately, a lot of political capital was already wasted on “rescue packages” and a beginning fiscal union, that solve nothing. But what is left of the political capital needs to be spent on these three areas (an appropriate ECB target, a differentiated monetary policy and a central banking authority) and not on a fiscal union that is bound to make things worse.