Europe's Parallels With The 1920s
Stephen Fidler: Policy makers are worried what dismal economic prospects will mean for politics in continental Europe—and whether it will foster political extremism which followed economic hardship in Europe in the 1920s.
The financial markets are signaling that the acute phase of the euro-zone financial crisis may be over and the crisis may be shifting into a chronic phase—or more precisely, a chronic phase with likely acute interludes in which panic escalates.
If this is right, what does it imply? Most economic forecasters are expecting anemic growth, with recession taking root in important economies such as France, and continued low interest rates. Public and private sectors in many euro-zone economies need to further reduce their debts—in the jargon, "deleverage"—so prospects for any real recovery seem a long way off.
This environment is less stressful than the recent past. But economic prospects for many people will be pinched, possibly for years to come, and some will feel hopeless of ever finding a better life.
Unsurprisingly, policy makers are worried what this will mean for politics in continental Europe—and whether it will foster political extremism such as that which followed economic hardship in Europe in the 1920s.
There is no way of knowing whether such concerns are well founded.
But some academics have been looking back at the 1920s to make comparisons with the present day—and they find similarities both in the nature of the economic problems and the adjustment efforts designed to alleviate them.
There are almost uncanny parallels even with the spectacle of the so-called troika of foreign officials from the European Commission, European Central Bank and International Monetary Fund that have been poring over the books in Greece's finance ministry.
In 1922, the League of Nations appointed a commissioner-general—Alfred Zimmerman of the Netherlands—to oversee in minute detail Austrian government policies and spending as the price for the financial support it was receiving from other governments (including Spain and Italy).
Patricia Clavin, a historian at Oxford University, says these creditors assumed "extraordinary powers" over the new government, forcing cuts in food subsidies and slashing the payroll of civil servants by 50,000. Austrian officials would have to take their government ledgers to Mr. Zimmerman to receive permission, frequently denied, to make payments.
The Austrian program was a model for later programs in Hungary, Bulgaria and, yes, Greece, and was used as a "background model" for dealing with the crisis in Germany's Weimar Republic, she told an audience at St. Antony's College last year.
Austria returned to the gold standard in 1924. In fact, Ms. Clavin says a total of 45 countries returned to the gold standard. Of the four great economic powers, Britain and Germany went in at exchange rates subsequently shown to be too high; and the U.S. and France at levels that proved to be much more competitive.
David Vines, an economics professor at Oxford, told the same audience of other parallels with the present day. In both, a crisis of excess debt developed, in the 1920s created by war and today by a decade in which the new common currency generated huge financial flows from Germany and other surplus countries to deficit countries of the euro-zone periphery.
Adjustment in the 1920s was the responsibility of the deficit countries (Germany and the U.K.) and not of the surplus countries (the U.S. and France.) That one-sided adjustment prolonged the period over which it could be made, and therefore extended the economic pain—as did the unwillingness or inability of governments to devalue their national currencies.
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.
So what can we say about political extremism? A paper published last year from three academics, Alan de Bromhead, Barry Eichengreen and Kevin O'Rourke, studied the rise of right-wing political parties in the Great Depression—right-wing because it was they, rather than the parties of the left, that made progress electorally in the 1930s.
Their conclusions are that political institutions and political culture mattered. Those countries in greatest danger of political extremism were those with relatively recent histories of democracy, those with existing extreme right-wing parties, and those with low hurdles for new parties to enter parliament.
Above all, they found, the risk was greatest where the economic depression lasted the longest.
Even Greece, one of the weakest crisis countries by these measures, is coming up to four decades of unbroken democracy. And as damaging and prolonged as its downturn has been, it has lasted nowhere near as long as the turmoil that afflicted Europe in the interwar years.
Ms. Clavin estimates the crisis only truly ended in 1949 or 1950: "There were four troubled decades, not two," she says.