Europe’s Parallels With the 1920s Post author By Philip Lane Post date January 11, 2013 here. Categories In Uncategorized 40 Comments on Europe’s Parallels With the 1920s ← Expulsions: The Fifth Circle of Hell → Breaking the link between banks and sovereigns (or not) 40 replies on “Europe’s Parallels With the 1920s” I presume I’m not the only reader unable to get anywhere with the link. Is the WSJ article just repeating points which Kevin O’Rourke and Barry Eichengreen made years ago? A very interesting article. However, wrong century! FYI a more pertinent article link posted by Frank Galton on another thread. http://www.nytimes.com/2013/01/11/business/global/the-cyprus-bailout-question.html?_r=0 Or maybe not! http://www.ft.com/intl/cms/s/0/74b16bc6-5c03-11e2-bf31-00144feab49a.html#axzz2HhXYihCe Cameron’s options grow ever narrower. http://www.guardian.co.uk/politics/2013/jan/11/cameron-merkel-eu-treaty For those who had the same problem I did, the article’s Google cache may work. That works thanks ‘This is, more or less, the world of adjustment in the euro zone. The ECB can, unlike in the gold-standard world, ease the symptoms but the adjustment is unavoidable. And the parallels are never complete: Unlike in the 1930s, governments haven’t reacted with aggressive economic nationalism and trade protectionism to the current crisis—yet.’ The globalisation of trade, the dominance of banking, and the associated hollowing out of productive capacity, has cut off those options for governments of today’s Europe. So ‘ the only thing that matters’ (or is deemed to matter by those with a vested interest in so framing the issues) is labour ‘flexibility’. ‘As regards the risks to economic activity, you are right, they stem essentially from a lack of action by the governments on the fiscal side; by this I mean that not only is continuing fiscal consolidation essential, but it also needs to be implemented in a balanced way, through a proper combination of government expenditure reduction, and taxation. The second point which, as many people have said, is becoming more and more important in reducing long-term imbalances in the euro area, is structural adjustment. That is essentially the only thing that matters with regard to imbalances in the euro area: structural adjustment, regaining competitiveness and creating a situation where you do not have a permanent creditor and lots of permanent debtors. That is where action is needed and will continue to be needed for the foreseeable future.’ ……. ‘There are certainly some elements of structurally high unemployment in what we see today. You referred to one. What is the reason for such high youth unemployment? If all workers were treated the same, unemployment would be distributed uniformly across the working population. The fact that we observe such high figures for youth unemployment means that we often have dual labour markets in which there are the young with very little protection and the old, the others, with a lot of protection, so unemployment gets concentrated in the young part of the population. And we know that this is because the greater flexibility that has been introduced since the beginning of the year 2000 was basically concentrated on the young part of the population, so when the crisis came, they were the first ones to lose their jobs. The next question is why there is very little mobility in this unemployment. Why are the workers not moving from the areas where there is no demand to areas where the demand for labour is better? These are all structural factors’ http://www.ecb.int/press/pressconf/2013/html/is130110.en.html Sorry para break missing there immediately after ‘flexibility’ when the quote from Draghi starts In any case, the message is TINA, as Thatcher used to say. DOCM, You really have to love the consistency of the EU and the Germans. A small peripheral Irish bank looks like failing. The Sovereign has to make the seniors and the depositors whole to save they system. One suspects it is because the owners of the liabilities were German? Years late, a collection of small Cypriot banks look like failing because of a EU policy to burn sovereign bond holders. This time it is Ok to burn depositors and seniors. Why, presumably because they are not German but Russian. How will Mr Putin perceive this? What should I now assume as a depositor in a European bank. Will the rules change again? In the 1920s’ Germans were seething with anger at the unfair conditions for reparations that were imposed on them by GB, USA, France and others at Versailles. Hyperinflation and the introduction of the Reichsmark (good as gold) with 1 RM = 1X10 to the power of 12 Papiermark. The people who fear fiat currency do have the facts to prove that even the paranoid have enemies. The introduction of the RM was what ground the German economy to a halt. From one day to the next they went from spending as quickly as possible to hoarding the RMs’ which were perceived to have real value and survived until 1948. The National Socialists got roughly 4% in the 1928 election and 18% in the 1929 election. The world wide depression cemented the downward trend which led to WW2 in 1938. There is no comparison between the 1920s’ and 1930s’ in Europe and conditions since 1945. Today every country in Europe has unemployment insurance, social service safety nets, public health care . Dying of hunger while freezing in the dark is not the end people meet these days. Desperate times require desperate measures and when times actually do become desperate there will be widespread unrest, governments overthrown, economic turmoil. This is the cradle of extremism not the cocoon that still exists everywhere except Greece. In Greece a military coup is the likely outcome, internment camps for hundreds of thousands on remote islands. Will Spain follow Greece is the question, not likely in my opinion because of the civil war in the 1930s and repressive rule by Franco into the 1970s’. I see no threat of extremism to the extent that it will throw Europe into political and economic turmoil leading to civil wars and replays of 1914 and 1945. I do see a split in the EZ between the Von MIses/Hayek camp and the Galbraithian camp. These battles will be fought in Brussels, Frankfurt, Paris, Rome and Berlin between well upholstered bureaucrats. It will not be a fast and furious battle, more like Chinese water torture. @ TMD It has not happened yet, burning depositors, that is. The reality is that Germany does democratic politics juts like any other country, a fact that the establishment in Ireland refuses to admit and which is the source of many missteps and errors of appreciation. What said establishment is also blind to is that it is part of the problem not of the solution. Times is, however, running out and with it the patience of the Troika. http://www.herald.ie/news/budget-wasnt-tough-enough-warns-troika-3350018.html €3 million for personal insolvency when the government is supposed to be concerned about the average punter! As we are in the ’20s! http://www.metacafe.com/watch/774918/charlie_chaplin_boxing_from_city_lights/ Character parts can be distributed as appropriate. The comparison with the 1920s are useful warnings. The 1920s shows how circumstances can deteriorate very quickly once a sustained period of economic decline takes place with no hope offered. Look at the people of Greece and Spain – no hope of reasonable economic prospects for many years. Look at Greece were a far right, shocking, party has grown rapidly. The reaction is fear but not an examination of the Greek situation. Greece is undergoing a complete breakdown of economic capacity and real depression era unemployment but at the same time is expected to still be able to absorb large amounts of new immigrants? Low demand, collapsed industry, very high domestic employment plus increased additional labour from abroad but still expected to grow its labour force each year. Does that sound like the 1920s. It doesnt even sound like the 1980s. Different world but the danger of extremists still looms and senseless policies still win out. Herr DOCM, That is a new low, even for you, in linking to the Herald. Who is the Troika losing patience with though. I ts eems to me there are just as p****d off with the FANGS for going slow on the debt restructuring as with the star pupil for getting a few sums wrong. In the end they need us to succeed or the European project she is kaput and the Germans have to explain how they destroyed Europe again. @ TMD Sorry about that! However, there is little point in shooting the messenger. I concede that there is a degree of loss of patience with the FANGS but that is something about which we can do little and on which we are wasting far too much of our ammunition. CMcC this morning crosses the Ts and dots the Is as far as the reality of the situation confronting us is concerned. http://www.independent.ie/opinion/analysis/the-recovery-has-not-begun-all-spin-aside-3350245.html Your last point is one that has quite a deal of support but it is not credible. The countries that are lagging behind in the recovery race are the same ones as have been in that position since the EU was formed. Europe will continue on her way. This time, the world is much better balanced with the reemergence of Asia and the related rises of Latin America and Africa. There is no alluring alternative to the mixed economy model. In Greece, a leftist government would possible be a good thing. The poetry would soon turn to prose. Mass nationalisation of industry would hardly be recipe for a recovery. Extremists can of course win electoral support while in modern times, given the recent experience in Thailand, armies are likely to be reluctant to assume responsibility of an open economy. @ TMD On the subject of the Germans doing politics like any other democracy. http://www.spiegel.de/international/germany/lower-saxony-governor-david-mcallister-faces-difficult-state-election-a-876644.html Schroeder has come out in support of Steinbrueck and attacks Merkel for putting electoral considerations ahead of all else, including the necessary decisions on Europe. Such an approach would never have seen the adoption of Agenda 2010 in his view, a direct assault on Merkel’s capacities as leader and a clap on the back for his own. I don’t know about the ‘parallels’ being relevant at this remove. Lot more involvement in many diverse ways. No EU, no Euro. Multiple confounding issues are the difficulty. What may be relevant (as always) are the internal political pressures brought on by the economic regressions being experienced in the different countries. The ruling elites will do everything possible (propaganda campaigns – especially against ‘foreign’ interests) in order to channel public opinion away from the real issues. Resorting to any sort of lethal activity (to supress dissent) must be considered a possibility – but only that. Cancellation of democratic freedoms is more probable. This has occurred already in the US. The UK is not an improbable candidate. Doubtful in other Nth-European states. The steady decline in total employments (and lower wages and salaries) guarantees some sort of social unrest (absent very substantial public and private debt writedowns and writeoffs). If the protests are confined to the usual street marches and rallies and electoral protest votes then the situation will remain as-is. But those banana skins are there – and waiting to be trodden on! You can forget about ‘global recovery’. Those countries not in active recession would resist any voluntary reduction in their overall economic activity in order to allow those in recession to stage some level of ‘recovery’. Looks like we are stuck with the current situation for a few years yet – or at least until our next (scheduled) general election in early 2016. If our government can ‘manufacture’ any plausible recovery scenario before this – no matter how dilute, then they might opt for a snap general election in 2014. Who knows? As a matter of interest. If the gov decided to restrict the importation of any foodstuffs that could be grown here in Ireland, what might be the reaction. Imported food (other from across our land frontier) comes with a ‘Food Miles’ cost. Who is carrying that cost? If in addition, there was a ‘blister-pak’ levy applied to all pre-packed food stuffs. How might this be received? Agri and food production and supply are the only sectors which appear to have any significant employment potential (20,000 – 30,000). @DOCM Enda live on rte at 1. When pressed if there was a plan B in the event of no deal on bank debt he said he didn’t contemplate defeat and was adamant we would get a deal before the end of march. Is he trying to bounce the ECB and or Merkel into some sort of compromise or has something been decided at official level that only he and Noonan are aware of? Apart from the preliminary bull he actually sounds like he knows what he is doing. Brian Woods senior: wrote: “Resorting to any sort of lethal activity (to supress dissent) must be considered a possibility – but only that. Cancellation of democratic freedoms is more probable.” Goodness maybe John Bruton was right about the stuff you read on the internet. Do you really think the very wealthy are going to react to the mansion tax in a way that requires all of that? or he’s bluffing and there’s no deal and no plan b. any deall anyhow will be minimal Off-topic, but long-running saga continues here: “THE European Ombudsman has begun a formal investigation into the European Central Bank’s refusal to release the letter that bounced Ireland into the bailout. “Two senior executives from the Ombudsman travelled to the ECB’s headquarters in Frankfurt in December to view the letter which the bank is refusing to allow the citizens of Ireland to see.” http://www.independent.ie/business/irish/probe-into-ecbs-refusal-to-release-secret-bailout-letter-3350480.html With timeline for Gavin Sheridan at The Story here: http://thestory.ie/2013/01/10/that-ecb-bailout-letter-an-update/ @anewdawn. Reading Pat Leahy in the SBP it looks like they are briefing (senior anonymous figures quoted) that no deal would spell catastrophe for the Coalition. Agree any deal will likely be minimal but will, if secured, be trumpeted as a major breakthrough …..still leaving us with 64b of bank debt. @ Flj Who knows? I certainly don’t. There is, however, a hint of “hold me back or I will do myself (or us all!) a mischief”. @ Gavin Kostick It was the butler in the Galway tent with a paper knife! @ All Cliff Taylor in today’s SBP under the heading “A good week but keep the perspective”. “That said, our politicians and senior officials need to be careful in selling the Irish message. Patrick Honohan, the governor of the Central Bank, opined last week that the markets were not rewarding us for progress on reducing our deficit. I would think, on the contrary, that with a debt ratio of 120 per cent-plus, a deficit last year of 8 percent and no deal yet on our historic bank debt, their willingness to lend us money at an annual rate of just over 3.25 per cent was fair enough”. One assumes that the markets know that the money (borrowed) to pay the PNs is factored into the Irish recovery programme. What is at issue is not the capacity to pay but the incapacity of the political establishment in Ireland to pay the political cost of picking the remaining high hanging fruit – and the unwillingness of the rest to bear the actual cost – and very little else. Incidentally, on RTE today (MF programme), on the subject of increments, a trade union representative opined that TD’s did not not suffer such an imposition. They entered the scale at the top! With such a confusion with regard to the very essence of the democratic process, what can one say! @ All On the subject of “high-hanging fruit”, the supposed constitutional impediment with regard to property rights merits some serious examination in the light of what the relevant article in the Constitution actually says. Article 43 1. 1° The State acknowledges that man, in virtue of his rational being, has the natural right, antecedent to positive law, to the private ownership of external goods. 2° The State accordingly guarantees to pass no law attempting to abolish the right of private ownership or the general right to transfer, bequeath, and inherit property. 2. 1° The State recognises, however, that the exercise of the rights mentioned in the foregoing provisions of this Article ought, in civil society, to be regulated by the principles of social justice. 2° The State, accordingly, may as occasion requires delimit by law the exercise of the said rights with a view to reconciling their exercise with the exigencies of the common good. @ All FYI An insight into how we arrived at the position in which we now find ourselves. http://www.finance.gov.ie/viewdoc.asp?DocID=1365 @ All And the utterly inadequate response. http://www.reviewbody.gov.ie/Documents/Report%2044.pdf This effort can be characterised as total twaddle. What Austria can afford to pay its public servants – to take just one example – has clearly nothing to do with the case. The Review Body on Higher Remuneration in the Public Sector (what a title!) should be abolished and with it all the “relativities” which keep the beneficiaries in the style to which they have become accustomed (senior staff in universities included). @DOCM And look at the occupation of the Chairman! @docm You are forgetting the FCT constitutional amendment which, de-legitimises Bertie’s, among others’, legitimate expectations. “No provision of this Constitution invalidates laws enacted, acts done or measures adopted by the State that are necessitated by the obligations of the State under that Treaty” Mind you, form suggests an Irish government having no legal or contractual impediment to taking action its own constituencies wouldn’t like, will simply result in it pretending it is powerless to act. Clause 1.28 of the Croke Park Agreement says: “the implementation of the agreement is subject to NO CURRENTLY UNFORESEEN budgetary deterioration.” Now if you can read, and are capable of working out that the only possible meaning of the words “currently unforeseen” is to define a budgetary deterioration not expected when the agreement was made in March 2010 about six months before the IMF were invited in, then you know the adherence to all the other parts of that agreement constitute a series of political decisions to voluntarily stick to it. That hasn’t stopped the government spinning that there is nothing in the agreement that would allow it to exit, then apparently providing Peter Mathews with a different and less powerful wording to trot out on the telly. The honest thing to have done was to own up to this and argue the case that irrespective of the option not to, it was the right thing to do for the economy. I think we have proved over the last couple of years that it is an entirely academic exercise to air the truth in media such as this… So lets be clear, the government will seek to protect its own, using pretend legal impediments to avoid doing otherwise, but all of that will be nothing more and nothing less than a political action. Do you think the politics are likely to change? @ grumpy There is no EU law relating to property rights as enshrined in the Irish constitution. There would be uproar if there was! As no less a person that a distinguished former member of the Supreme Court opined on RTE today, it is common for attention to be drawn to the first paragraph of Article 43 and to ignore the rest. “The government will seek to protect its own”. What does that mean? That parties will try to retain their electoral support is part of the democratic process. The exposure of cant in the public debate is another (not that I think that you are in any way guilty of that). The two are often irreconcilable. I do not think that the politics will change. But facts are obstinate and do not change. @docm “There is no EU law relating to property rights as enshrined in the Irish constitution. There would be uproar if there was!” I think we might be thinking about different things here. ‘Property rights’ such as formerly private, but now public pensions, for bank staff, ex-politicians, contracts protecting salary and bonus arrangements entered ito by the state (or a now nationalised business) are currently thought unassailable because of the protection of the constitution. The FCT amendment allows an act or law passed by an Irish parliament to bypass that protection if, say, new contractual, pension, garda driver & car arrangements etc were considered necessary for the state to meet its FCT obligations. This, like 1.28 of CP will be studiously ignored by probably everyone except, possibly, SF. ““The government will seek to protect its own”. What does that mean? That parties will try to retain their electoral support is part of the democratic process.” You pose the question and give an answer – only I don’t think its quite as clean as that – its a bit more tribal imho. re: Croke Park 1.28 A change such as getting rid of the final point on all incremental scales over €50,000, and the final two points on all scales /rates over €100,000 would be simple, easy and difficult to object to on the basis of equity and of where we are. It should of course include pensioned staff. @ grumpy I am not a lawyer but the wording to which you refer has always seemed to me to have been inserted simply as a belt and braces approach to avoid any constitutional challenge by copying that which was inserted when we joined the EU. The latter dealt with the fact that laws passed by the EU supersede those adopted nationally and even constitutional provisions; hence the need for continuous referendums. (A more widely drafted text initially would have avoided this need except when additional transfers of sovereignty were involved.) But the FCT is not an EU but a standard international treaty which has no such impact. It simply commits the parties to do certain things nationally. And, in any case, any legislation adopted by the EU can only happen under the existing Lisbon Treaty; Six-Pack, Two-Pack etc. The process does not work in reverse. But you raise a very interesting point that demonstrates the foolishness of somehow thinking Ireland is special, even when it comes to referendums. No other signatory to the FCT deemed it necessary to hold a referendum. As to property rights “being currently thought unassailable”, this is only the case because people judge that the political and societal will to think otherwise is lacking. On that point, we agree. Austerity and deleveraging ..an interesting viewpoint.. http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_13/01/2013_478232 Mario saved the rich and he must now save the poor.. http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9798790/Mario-Draghi-has-saved-the-rich-now-he-must-save-the-poor.html @ PQ “Why are the workers not moving from the areas where there is no demand to areas where the demand for labour is better?” One might as well ask why there are so few Borussia Dortmund fans in Kildare. Another parallel with the 20s is the reemergence of the ultra rich They went into hiding after the second world war http://www.amazon.co.uk/Brideshead-Revisited-Collection-Digitally-Remastered/dp/B0055CF9N6/ref=sr_1_1?ie=UTF8&qid=1358169257&sr=8-1 but are back in force now http://therunto.com/ @docm I am fairly sure you are right re cutting and pasting. However I noted legal academics of a constitutional tendency were curiously unwilling to publicly engage over the implications of the wording, preferring to repeat that the wording was the same as..etc. It was almost as if they were on the pro-Treaty ‘team’. However, the wording is not the same, much of the phrases were lifted, but have been combined with new wording referring to the FCT. The supreme court would be unlikely to be impressed with “but, but,.., it doesn’t matter what it says, its a similar type of wording to..” What actually matters is what the words say – and that seems reasonably clear. The meaning of “necessitated” is probably the most arguable. Our opportunistic chancers are quite incapable of reining in wages in the P.S. and the Quangos. This is a universal problem not confined to Ireland. Imposing a meaningful property tax is also well outside their range of capabilities. It has to be the classic Adam Smith “Invisible Hand” of high inflation that cannot be pinned on the denizens of Kildare Street. Granted membership in the EZ presents us with an unsurmountable obstacle in the form of the FANG. I have said before and I will say again that we have to join the non FANG majority to defang the FANG by suspending their membership in the EZ. (Merkel on probation). If Hollande can bomb hostile forces in Mali he is more than capable of decisively ejecting the problem children. Poor GB saddled with right wing, upper class twits and unable to compete is making mild threats about leaving the EU. One should never underestimate the damage that delusions of superiority and jingoism can do to a country. Croke Park 2 http://www.irishtimes.com/newspaper/breaking/2013/0115/breaking5.html The scale of the management proposals – aimed at €1 billion in savings on the Government’s pay and pensions bill on top of those already secured – shocked many trade union leaders. Union leaders set out their proposals for the talks yesterday and hope to negotiate significant changes. However, there were concerns among some leaders last night that the scale of change to the proposals that would be required to facilitate a deal would generate significant political difficulties for Mr Howlin. The largest public service union, Impact, said last night it did not believe a deal would be possible if it embraced all the proposals. It would not put such proposals to ballot as they would not pass, it said. @mickey h I know the “delusions of superiority” thing always gets a ready audience in Ireland, but to be honest you could probably make a stronger case that there is and has been for half a century delusions of inferiority prompted by its post WW2 economic and international decline and inability of its footballers to score penalties. Watching Mary Harney and Irish businessmen prance around the European stage suggested to many objective observers that Ireland had delusions of superiority. If George Osborne, insightful chap that he is, though his country was superior, why would he have done this 😉 ? http://blogs.ft.com/westminster/2010/11/osbornes-paean-to-the-irish-economy/ “A generation ago, the very idea that a British politician would go to Ireland to see how to run an economy would have been laughable. The Irish Republic was seen as Britain’s poor and troubled country cousin, a rural backwater on the edge of Europe. Today things are different. Ireland stands as a shining example of the art of the possible in long-term economic policymaking, and that is why I am in Dublin: to listen and to learn. …..The new global economy poses real long-term challenges to Britain, but also real opportunities for us to prosper and succeed. In Ireland they understand this. They have freed their markets, developed the skills of their workforce, encouraged enterprise and innovation and created a dynamic economy. They have much to teach us, if only we are willing to learn.” Lots of Brits think the EU is rubbish, the Euro is rubbish, the Americans are deranged and the country has to slash spending or it is Greece. Interesting historical piece in the WSJ (doesn’t appear to have been posted before now). http://online.wsj.com/article/SB10001424127887324081704578233711771426512.html Great apologies Phillip. Only catching up with this one now. Saw the article and remembered the heading here. very interesting I must add. Comments are closed.