Europe faces its old demons

The European government elites are sinking into denial. Their frightened posture against public deficits and preference for strict financial orthodoxy is a reflection of an age-old tendency for self-destruction. However, the current version of this tendency is about to lead them to a nasty state of affairs. I am referring to the ascension of extreme-right political movements in many nations within the shell without a soul we still describe as…the “European Union “. It would be unfortunate for these elites (and all of us) not to draw parallels and valuable lessons from the tragic 1930s and apply them to today’s situation.

The 1930s saw a global deflationary calamity. Can this not be attributed to the actions of France regarding the gold standard? And were not these actions mainly responsible for the intensification of the Great Depression in Europe? Without any consultation with the other great powers, the French Government massively increased its gold reserves from 7% to 27% between 1927 and 1932. This decision substantially contributed to dry up the availability of gold in the world markets. France was therefore a direct contributor to the deflationary spiral that was to aflict all the developed nations at the time. Deflation was a major consequence of the Great Depression and it would have been avoided if the Central Bank of France had maintained its gold ratios in 1927. This frantic accumulation of the yellow metal greatly fueled deflationary pressures. If France had maintained its gold reserves at the levels prior to the Great Depression it would not have altered the historical correlation between consumer and production prices. And it would have kept gold reserves stable at banks around the world. Eventually, Prime Minister Leon Blum took France off the gold standard in 1936 but the damage was done.

What a pity that today’s politicians are also not historians because the conditions of the 1930s are strangely similar to our current period. It is the Euro common currency – in its current form – which serves as the new gold standard. And it was Germany in the 1930s that was in the same situation as suffering Greece, Italy, Spain and Portugal are in today! Entirely dependent on foreign funding in order to survive, Germany had indeed been crushed by the exagerated punitive measures dictated by the Treaty of Versailles. All of her national banks were grossly undercapitalized. The violent and unprecedented austerity that Germany endured in the 1930s was a result of the demands imposed by her international creditors. It had the effect of severely increasing her unemployment rate, which peaked at 35% of the working-age population.

Meanwhile, the France of the late 1920s to mid 1930s was doing quite well. She was today’s Germany. She had one of the most prosperous and robust economies in the world; she was sailing through those difficult times with single-digit unemployment rates and enjoyed budget surpluses. Able to become the financial locomotive of Europe, France nevertheless preferred to wall itself into a selfish and withdrawn posture. She refused to adopt a conciliatory economic and monetary policy towards her neighbors and ignored the woes of the rest of Europe. The financial collapse of Europe owes much to the French navel-gazing at the time. Several European nations today can rightly blame German intransigence on inflation levels for their misfortunes. The Euro is indisputably a standard. However, it is so in the worst sense because it cannot be abolished like the gold standard.

What a pity that our politicians, economists and other brilliant minds from the “great schools” are not also historians. They would understand the harm of the gold standard, which, just like the Euro, can only allow adjustments, corrections and re-balancing through the sharp blade of deflation, the collapse of purchasing power and increased unemployment. Indeed, so many sacrifices and unnecessary suffering would be spared today to the affected populations in Southern Europe if nations like Germany would insist on a 2% inflation rate. With inflation rates in Europe at zero or negative levels, this 2% would be sufficient to accomplish the mission. It is unacceptable that the German government insist on a 0% target in open violation of the European Central Bank’s own 2% long-term objective.

Prosperity always comes with moral obligations and unlike the 1930s France of the gold standard, Germany today must admit that 0% inflation is just as bad – if not worse – than a 3% inflation target. A lower German inflation rate than the objective set by the ECB is more a sign of disease that of virtue. The whole European Union would be able to achieve an inflation rate of 2% if Germany were willing to temporarily tolerate a rate of 3% at home. And that is why Germany and all those who accept her dogmatic view are guilty of not meeting the European contract. They are responsible for the misery of the Greek, Italian, Portuguese and Spanish peoples who choke under a cruel and useless deflationary spiral. Worthy and sound management of a monetary union requires a degree of statesmanship that our current leaders seem unable to reach.

All the necessary poisonous ingredients are there today. Europe is on the same suicidal slope as in the tragic 1930s. How can Germany, the key member of the European Monetary Union, be indefinitely “not guilty” of unfair competition? And why does she give so much importance to the 1923 hyperinflation period when it should instead be deeply anxious to avoid 1933, which saw the extinction of its democracy? To all German government leaders, please go back to your school classrooms and relearn how a terribly mismanaged crisis brought horror to Europe in 1933!