We may not yet have succumbed to a Great Depression but depression, in one form or another, is all around us. And we are witnessing the rise of political extremism, a nationalist backlash against a country’s obligations towards its – typically foreign – creditors. Ghosts from the 1930s have come back to haunt us.
Recovery has either been remarkably muted or, in many parts of Europe, totally non-existent. For some eurozone nations, economic freefall threatens. Politicians and economists squabble over what needs to be done next, as noted by Jeffrey Sachs on the FT A-List (“We must move beyond growth versus austerity”, May 7, 2012).
The emergence of Nikos Michaloliakos and his Golden Dawn party – its emblem a thinly disguised swastika – in Sunday’s Greek elections together with the bumper vote for Marine Le Pen in the first round of the French presidential elections two weeks earlier only serve to highlight the growing disillusionment of voters with mainstream political parties seemingly able to offer neither jam today nor jam tomorrow. For those on the outer fringes of the political spectrum, this is fertile ground – as it proved to be in the 1930s.
The problem can be simply stated. With levels of national income now a lot lower than expected just five years ago, the willingness and ability of debtors to repay their foreign creditors has been seriously reduced. The new slogan for debtors is in danger of becoming “can’t pay, won’t pay”.
To date, the response of creditors has been to demand continued austerity from the debtors: higher taxes, cutbacks in public spending and regular doses of the economic equivalent of cod liver oil, all to be washed down with cheap loans from the International Monetary Fund, the European Central Bank and other generous benefactors. In return, there is a vague promise of a return to growth at some unspecified point in the future.
The creditors insist the debtors have only themselves to blame for the lack of growth. In the years preceding the financial crisis, southern European countries allowed their wages to rise far too quickly, thereby undermining competitiveness.
For creditors, it’s an attractive explanation because it lets them off the hook. Yet it’s an explanation full of holes. If competitiveness in southern Europe was so bad, why did northern European creditors lend to southern European nations with such reckless abandon in the first place? If the problem is only one of competitiveness, why have “well-behaved” northern European nations also ended up back in recession? The Dutch economy is shrinking again as is the UK despite – in the latter’s case – the supposed benefits of regular bouts of quantitative easing and, in the initial stages of the financial crisis, a huge decline in sterling. And if the story is only about competitiveness, why has the allegedly competitive US economy struggled to regain its pre-crisis poise?
Creditors typically absolve themselves from blame until it’s too late. And they demand adjustment from debtors even when the debtors no longer have the political capacity to do so. Yet, as the interwar period demonstrates, problems for debtors inevitably become problems for creditors too.
In 1931, Austria was attempting to deliver the kind of austerity now being witnessed in parts of southern Europe. Under the Gold Standard, the only option to regain competitiveness was to force domestic prices and wages lower. In the process, businesses failed, non-performing loans rose and the banking system began to look incredibly vulnerable. The crisis culminated in the failure of Creditanstalt, a major Viennese bank – the 1931 equivalent of Lehman Brothers. What had up until then been only a Great Recession turned into the Great Depression. A handful of years later, Hitler was welcomed by cheering crowds in Vienna.
For debtor nations, keen to escape from the clutches of their creditors, resurgent nationalism led to waves of default and, in time, to the politics of hate. For creditor nations – the US and France were the key players at the time – it was a rude awakening. Their own economies suffered more than most, a reflection of their adherence to economic orthodoxy – notably their continuing devotion to the Gold Standard – in the wake of an extraordinary economic and financial upheaval.
François Hollande has been elected president of France on a pro-growth platform. This may be no more than wishful thinking unless there is voluntary adjustment from both creditor and debtor nations. To achieve this – and to allow the euro to survive – there needs to be more, not less, Europe. The single currency will need to be buttressed by some kind of federal fiscal policy, including the issuance of common bonds. Lower wages in the periphery will need to be offset by higher wages in the core, prompting German capital to head south and Spanish and Greek workers to head north. And creditors must stop thinking about a world of only saints and sinners. Creditors and debtors are two sides of the same coin. Berlin should take note.
None of this will be easy. Perhaps the success of the far Right will spur mainstream politicians into action. The irony, though, is obvious. A successful resolution of the eurozone crisis needs “more Europe” but growing numbers of voters are beginning to demand less of it. The ghosts have returned.