Europe: From the Financial Crisis to the Great Recession to the Lesser Depression to the Greater Depression

Back in 2007 I used to have an applause line: that because the North Atlantic had lived through the Great Depression, we would not make the same mistakes in dealing with our current crisis that the policymakers of the 1930s had made. Instead, I said, we would make our own, different mistakes.

Boy, was I wrong with respect to Europe!

Barry Eichengreen: Saving Greece, Saving Europe: “The Eurosystem has been rendered more fragile and subject to destabilization…

…Other European finance ministers will have to answer for agreeing to forward to their leaders a provisional draft containing Schäuble’s destructive language…. The new program is perverse… will plunge Greece deeper into depression… provides no basis for recovery or growth. The Greek economy is already in free-fall, and structural reforms alone will not reverse the downward spiral…. As the depression deepens, the deficit targets will be missed, triggering further spending cuts and accelerating the economy’s contraction. Eventually, the agreement will trigger Grexit, either because the creditors withdraw their support after fiscal targets are missed, or because the Greek people rebel. Triggering that exit is transparently Germany’s intent.

Finally… privatization at fire-sale prices, with most of the proceeds used to pay down debt, will not put Greek parliamentarians or the public in a mood to press ahead enthusiastically with structural reform. Greece deserves better…. Other European countries should not in good conscience accede to this politically destructive, economically perverse program… should not allow the European project to be sacrificed on the altar of German public opinion or German leaders’ insistence on “rules.”… Franco-German solidarity would be irreparably damaged, but Franco-German solidarity is worth nothing if the best it can produce is this agreement. Last but not least, the German public deserve better…. They deserve their fellow Europeans’ admiration and respect, not renewed resentment and suspicion.

Eight years after 1929, even France had exited from the hold-strong-to-fixed-currency-parities-and-“structural-reform”-and-pray-for-the-confidence-fairy-to-rescue-us policies. Now, all of the eurozone is still in the trap. The fact that the depression came on more slowly than 1929-1933 has played a role.

But the principal cause is I think, Germany’s role as effective European hegemon plus the fact that distress in southern Europe is good for the German economy: every time a policy car is torched on the streets of Athens, the value of the euro drops and another container full of washing machines departs from Hamburg. Couple that with the agreement of the eurozone’s great and good that “structural reform” is both necessary and also impossible in periods of full employment, and they reassure themselves that everything is going to plan. The fact that the eurozone has broken the promise of economic prosperity and convergence that used to underpin it is not a major concern.

And, on the other side, we have the strange and mysterious attachment of southern Europeans to the euro. It is part–maybe all–of being a “prima liga” country. It is part–maybe all–of being a real part of Europe.

Economic reality is that a prosperous business sets the price of what it sells neither too high to attract demand nor too low to attract revenue, and sticking to a high price when demand ebbs is disastrous. Economic reality is, similarly, a prosperous country needs to behave like a business and set the value of its currency–the price of what it sells–neither too high to attract demand for its exports nor too low to create unattractive terms-of-trade, and sticking to an overvalued currency when demand ebbs is disastrous.

Economic reality is nowhere here.

If Europe’s political masters were intelligent right now, I think they would abandon the euro and their freedom of action in monetary and macroeconomic policy, and bind themselves to obey a joint U.S.-IMF hegemon in international finance, monetary, and macroeconomic policy affairs.

But there is little in their reaction to this crisis–to what we need to now start calling: “Europe’s Greater Depression”–would lead anyone to think that they are intelligent.