Abstract
The Eurocrisis displays an astonishing similarity to the causes of the Great Depression in the form of massive current account imbalances, destabilising capital flows, financial fragility, and the commitment to defending a fixed exchange rate arrangement by means of austerity and internal devaluation. From the interwar economic and political disaster Europe eventually drew the lesson that internal balance had to enjoy priority over external balance, giving rise to a three-decade long period of unprecedented economic growth after the Second World War. As Europe has again stumbled into many of the policy errors that caused the Great Depression, it will need to relearn some of these lessons. In particular, the paper suggests that Europeanisation has gone too far and that rather than completing the monetary Union, Europe's prosperity and political stability would be better served by compartmentalisation of financial markets, vertical industrial policies and an escape clause in the common currency allowing for temporary exit in case of fundamental disequilibria.
Highlights
The political and economic dynamics of the Eurozone crisis has come to display astonishing parallels to the interwar Gold Standard (Eichengreen 2015; Eichengreen & Temin 2010; O’Rourke & Taylor 2013)
Like the resurrection of Gold Standard in the mid-1920s, agreement on the introduction of a common currency was primarily driven by the desire to impose discipline on a political dynamics that seemed to drive escalating budget deficits and rampant inflation
Like the interwar Gold Standard, the attempt to defend the common currency by means of internal devaluation and austerity proved immensly costly in terms of growth and unemployment and provoked political polarisation and extremism, placing the issue of the compatibility of capitalism and democracy again on the political agenda (Funke et al 2015)
Summary
The political and economic dynamics of the Eurozone crisis has come to display astonishing parallels to the interwar Gold Standard (Eichengreen 2015; Eichengreen & Temin 2010; O’Rourke & Taylor 2013). Like the interwar Gold Standard, the attempt to defend the common currency by means of internal devaluation and austerity proved immensly costly in terms of growth and unemployment and provoked political polarisation and extremism, placing the issue of the compatibility of capitalism and democracy again on the political agenda (Funke et al 2015). Similar to the post 1918 inflation experience that can explain much of the decision to resurrect the Gold Standard and the tenacity with which governments clung to it, the breakdown of the post-war consensus gave rise to a policy regime in which governments sought to enlist the support of markets and European integration to force their economies into a rigid nominal framework.
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