The euro isn’t solvent in growth

October 15, 2016 0 By Michel Santi

What a shame it is that politicians aren’t historians too! And that it is regrettable for all of
us that they aren’t looking back to the year 1931 – a tragedy, among other things – in order to draw parallels and precious lessons for today. Let’s remember the bankruptcy of the very large Austrian bank, Österreichischen Kredit Anstalt, which occurred in an environment of general financial instability and European monetary implosion due to unpaid German reparations. That was, up until the US intervened by restructuring the debts of a Germany that was clinging to the gold standard, albeit one of the main reasons or the Great Depression. It was nevertheless the countries who first abandoned the gold standard (Great Britain followed by the Scandinavian countries) who were the first to pull themselves out of this appalling crisis. The unexpected hike of American interest rates in 1928 of course gave the starting signal for this crisis.

Forasmuch, the global deflationary calamity combined with the contraction of every economy took its roots in the gold standard and this was mainly due to the attitude of, wait for it, France, described by a number of specialists as the main reason for the exacerbation of the Great Depression! It was effectively France’s substantial increase of its gold reserves – from 7 to 27% between 1927 and 1932! – which, bringing about the rarefication of the metal, was to contribute undeniably to the creation of a gigantic deflationary spiral for all the developed nations of the time. Deflation, having been a distinctive sign of the Great Depression, could have been avoided if the central banks of the time (and first of all the French one) had maintained their auriferous levels of 1928…What a shame it is that politicians aren’t historians too since the conditions of the 1930s look strangely like our current period, except that at the time it was Germany that was in the situation that outer Europe finds itself in today!

Wholly dependent on foreign funding, the country had had the stuffing knocked out of it by the unrealistic reparations stipulated in the Treaty of Versailles, and had been suffering hyperinflation since the beginning of the 1920s in an overall climate of grossly undercapitalised national banks. It was therefore a program of brutal and unprecedented austerity that it had to enforce in order to dry up its international financing, hence an unemployment rate that was to pass 35% of its population at one point. France – which at the time was the Germany of today – was doing well: it boasted one of the time’s most prosperous and solid world economies and navigated choppy waters while keeping the unemployment rate to one figure and displaying enviable accounting surpluses. In a position to become the financial engine for the rest of Europe in the period between the end of the 1920s and the very beginning of the ‘30s, France nevertheless preferred to wall itself off to be selfish and withdrawn, refusing to adopt an expansionist and conciliatory economic and monetary policy, opting rather to ignore its neighbours’ woes. Europe’s financial collapse owes a lot to this French egotism of that time.

Just like many European nations can, with good reason, now blame German intransigence for the intolerable extremity that they have come to. Also, France was not able to escape this crisis that was to seriously contaminate it from 1932 onwards. How is it not recognised that the France of those years is the Germany of today, the Germany that is getting itself tangled up in false steps and has been wallowing in mistakes for which it will end up paying the price dearly, just like France did? Because if there is one country which, out of all of them, is concerned with retaining its lessons learned from the past, it is Germany.

So, why does it attribute so much importance to the hyperinflation of 1923 when it should rather be seen to be worrying about the year 1933, the year that saw the extinction of its democracy? May Madame Merkel take a trip back to school and relearn how a European banking crisis triggered in 1931 shook her country – and Europe – to its core in the horror show that was 1933!