In her recent piece, PolicyMic pundit Jeanne Vickery considers the question of whether the ongoing European debt crisis is similar to the lead-up to the 1930s Great Depression and World War II, reaching the conclusion that there is enough evidence that such is the case – not in the least backed by her citation of IMF Chief Christine Lagarde’s warning of an economically anaemic 2012.
Vickery’s proposal reflects a sustained analytical and media trend in comparing today’s crisis to the 1930s through a "Great Recession" rhetoric. But it is misleading to suggest that the two events mirror one another, as global interdependence is much greater today than in the 1930s, global war is not an issue, and there are more stakeholders in the global system now than there were back then.
Europe’s challenges are quite different than those faced in the 1920s and 30s. For one, the current economic challenges follow on the heels of a period of economic growth rather than the analogous end of World War I. Second, Europe is consolidated politically and economically on an unprecedented historical level – thus, talking about protectionism is simply not accurate. Third, China is the EU’s second largest trading partner, with a foresight of claiming the top spot in the longer term. In the 1920s and 1930s, China was split between Chiang Kai-shek and Mao Zedong in a decades-long bloody civil war and was not a salient factor for either America or Europe to the same extent as it is today. Fourth, the existence of the EU’s structural funds, in turn, is an outcome of the viability of the high degree of integration in Europe. It is therefore possible to say that while the economic situation on the continent is serious, it is by no means extremely fragile, as Vickery contends.
The lesson from the European debt crisis, I think, is that it is impossible to have a sustainable monetary policy without a controlled fiscal policy. The Maastricht Treaty criteria which bind the EU are supposed to prevent euro zone members from maintaining unsustainable balance of payments positions, but as we have seen, these rules are not enforceable without a supranational solution to keep track of how states form their budgets and borrow money. The fiscal compact to be discussed by German Chancellor Angela Merkel and French President Nicolas Sarkozy later this month is an indication that Europe is moving in the right direction by setting up rules that will prevent the recurrence of such a crisis.
Vickery recommends shutting down markets and transactions for a week to restore confidence in the financial system, akin to Roosevelt’s shutdown of the American system for a week in 1933, which she points to as an example.
She is correct in saying that it allowed Washington to put in place policy measures that would restore overall confidence in the country’s financial system. But there are several implications for this solution that makes it practically impossible to carry out in 2012. Capital flows are global to an unprecedented degree, and the financial health of Europe is the stake for very influential external partners – China, America, and Russia, among others. A halt to transactions, for instance, involves stopping trading in oil. The disruptions for both producers and consumers would cause significant losses to industry, not to mention the political careers of some government leaders. Freezing transactions was possible in 1933, because the centers of economic activity, in the U.S. and Europe, dictated global trends to a world that was not as populated, developed, or connected as it is today. Now, for instance, China is dependent on America as a vital export market, while America is dependent on China to finance unsustainable deficits, and Europe depends on both for its own balance of payments balance in terms of trade.
Thus, taking a “fiscal vacation” is not only unwise, but will also set dangerous precedents that threaten an already fragile recovery.
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