Morning Must-Read: Kevin O’Rourke: Deflation: The Euro Zone Needs a History Lesson

Kevin O’Rourke: Deflation in the euro zone: The euro zone needs a history lesson:

Europe’s policy-making elite… [has chosen:] to preclude any form of debt mutualisation; to have individual debtor countries pay off their existing debts; and to have them adjust macroeconomically via austerity and deflation. In Münchau’s words, ‘If you look at this with a knowledge of economic history, this is an awe-inspiring set of choices, to put it mildly’. He’s right…. The gold standard turned out to be hostage to the exogenous evolution of prices. Over… 1873-96, the declining price trend exacerbated the public finance problems of the periphery to breaking point. After 1896… inflation made convergence and steady participation in the gold zone much more attractive…. The pernicious effects of deflation on debt sustainability were further in evidence in the interwar period…