Charles Kindleberger, the great economic historian, once noted that the Great Depression was so deep and so long because of “British inability and American unwillingness” to stabilize the system. Among the functions that the great powers failed to perform, a few should ring a bell to European leaders today. Kindleberger singled out their failure to “maintain a market for distress goods” — that is, to keep their domestic markets open to imports from crisis-stricken economies.
Surely history is not repeating itself — at least not in the literal sense.
European creditor countries today are not tempted by anything like the US’ Smoot-Hawley Tariff Act, which crippled world trade in 1930. Germany, the Netherlands, Austria and Finland remain committed to the EU’s single market for goods and services (though their national regulators hinder intra-European capital flows).
Still, one cannot help but notice similarities with the 1930s.
At the time of the Great Crash, the US and France were piling up gold as fast as the Weimar Republic was piling up unemployment. Today’s northern European countries are running up record current-account surpluses, just as some southern European countries are experiencing Weimar-level unemployment.
For Italy, Europe’s fourth-largest economy, the current slump is proving to be deeper than the one 80 years ago. Meanwhile, huge savings and potential demand for consumer and capital goods remain locked up next door.
How did this happen? As Kemal Dervis has pointed out, the cumulated current-account surplus of the Scandinavian countries, the Netherlands, Austria, Switzerland and Germany is now about US$500 billion. This dwarfs China’s surplus at its mercantilist peak of the mid-2000’s, when the G7 (including Germany) regularly scolded the Chinese for fueling global imbalances.
More striking still, in the now-rebalancing eurozone, many countries’ current accounts are trending toward balance (and Ireland has recently moved from deficit to a small surplus).
One exception is Germany, whose external position strengthened over the last year, with the surplus rising from 6.2 percent to 7 percent of GDP — all the more remarkable in the context of a European recession and a slowing domestic economy.
Indeed, Germany’s GDP grew by just 0.9 percent last year and is forecast to slow further this year, to 0.6 percent. Slackening growth, declining private and public debt, and super-low interest rates would suggest loosening up a bit and supporting aggregate demand.
Instead, a distorted view of what competitiveness really is (mis)leads politicians to consider large external surpluses an unqualified good and a testament to virtue, whatever the consequences abroad.
The second exception is France.
Over the last year, France’s external deficit deteriorated further, from 2.4 percent to 3.5 percent of GDP. France now faces zero or negative growth this year, and seems to have reached the point at which it must reverse course on competitiveness or risk more trouble ahead.
Unfortunately, this, too, is reminiscent of the 1930s. To paraphrase Kindleberger, French inability and German unwillingness to stabilize the system are contributing to an ever more intractable European crisis.
In this respect, the debate in Brussels concerning the “right” amount of austerity misses the mark; in the same vein, southern European leaders’ strategy of blaming German Chancellor Angela Merkel for their own tax increases looks increasingly futile. It is not Germany’s fault that Italy and Spain had to tighten their budgets last year. As research by Ray Dalio shows, any country with an average cost of debt far above its nominal GDP growth has little choice but to resort to belt-tightening.
For example, in November 2011, interest rates on Italian sovereign bonds were about 8 percent all along the curve, even as the government faced refinancing needs totaling nearly 30 percent of GDP over the following year. Because debt monetization was not an option, austerity had to ensue at that point, regardless of what Merkel — or anyone else — had to say.
This suggests a collective failure by European leaders to frame the response to the crisis properly.
Southern European leaders have wasted time and energy asking Merkel for weaker fiscal medicine. Merkel and her allies have invested just as much political capital in resisting such pressure.
Meanwhile, the European Council has become a theater for tired repetition of the same old show, performed mostly for domestic audiences, with little attention devoted to the opportunity — once Italy’s political stalemate has ended and Germany’s upcoming election is over — to re-write the script.
Southern countries, still largely in denial, should accept the need for deeper, competiveness-enhancing reforms.
Germany and its allies, for their part, should accept that running high external surpluses is damaging the eurozone and themselves, and that it is time for them to put part of their huge excess savings to work to support growth. The failure of leaders in France, Italy and Spain to raise this issue more effectively has been a clear shortcoming so far.
Without a pro-growth, pro-reform deal, southern Europe’s attempts at deleveraging may result in a politically destabilizing depression.
As Mark Twain famously observed: “History doesn’t repeat itself. At best, it sometimes rhymes.”
In Europe’s case, the poetry could be very dark.
Federico Fubini is an Italian award-winning author and financial columnist.
Copyright: Project Syndicate