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Blame the Eurocrats, not the Speculators

Ryan Avent shares his take on what the 1930s tell us about the current collapse of the Euro:

There is a striking irony to the current situation in the euro zone. It's often assumed that hyperinflation gave the world the Nazis; that's wrong. The hyperinflation ended in 1923, and the German economy and political system functioned fairly well from then until 1929. The rise of the Nazis was precipitated by the stunning economic collapse that began in 1929, but which intensified significantly in 1930 and 1931. During the recovery years, the German economy accumulated a significant amount of debt, as lenders rushed to take advantage of the boom. When the economic crash hit, Germany found itself squeezed on two sides. The economy was crushed by an intense cycle of deleveraging and austerity, as the government struggled to maintain market confidence. And pressure was also applied on the monetary side, as Germany battled to fight gold outflows and keep itself on the gold standard.

The gold standard had long threatened to destabilise Europe, thanks to a fundamental imbalance among the continent's large economies—Britain, France and Germany. France had huge gold reserves while Britain and Germany had meagre stockpiles. As a result, the latter two were often confronted by the need to tighten policy to fend off market attacks on convertibility, the process of which damaged their economies and contributed to market scepticism. As European economies like Austria and Germany flailed, America, Britain and France scrambled to assemble aid packages that might prevent a collapse, but these negotiations were inevitably characterised by petty disagreements and myopia, and the resulting aid packages were always too small and came too late.

Eventually, the system failed entirely, countries began abandoning gold, reinflating, and spending heavily on an arms buildup. The back of the Depression was broken. But it was too late to save Europe from utter catastrophe.

The European Union, and its single-currency extension, were forged in the decades following the war in an effort to make sure that war never again divided and savaged the continent. But strangely enough, in the effort to tie itself together, Europe imposed some of the same fiscal and monetary constraints that precipitated the collapse of the 1930s. And here we are, watching history repeat itself. Within a Europe riven by imbalances, the fiscal and monetary screws are once again being applied to countries with no hope of escaping their financial burdens. Markets are attacking, and efforts to salvage the situation through massive aid packages are emerging too small and late to matter. The pressure within the squeezed economies is building, and that pressure will find a release, one way or another. A Europe hoping never to repeat its historical tragedies has gone and blundered into institutions that make those same tragedies more likely. The European project, as it looks now, has failed.

My view is that the pressure this time is less intense and the institutional environment is stronger. As a result, I think it's really, really, extremely unlikely that the euro-zone crisis will culminate in a new continential war with associated horrors. Really unlikely. Odds are good, however, that once again the prevailing system will break down. And the end of the euro zone in its current form won't be pleasant at all, in the short term anyway.