It’s a life time since
the Great Depression but the events on the twenties and thirties maintain a strong
hold on our economic and political psyche.
During the intervening years the gold standard has figured prominently as
the boogieman that deprived countries of the policy options required to combat
the deepening slump. Firm evidence for the overly restrictive nature of the
standard is provided by the economic rebound enjoyed by most countries choosing
to exit the system, Britain being foremost in this regard. What’s puzzling us today is why countries
stayed wedded to the gold standard for so long.
The relative merits of the gold standard depended on the valuation on
joining; France joined as an under-valued
currency whereas Britain re-joined in 1925 as an over-valued currency, this
meant that when recession struck Britain was at a significant
disadvantage to France and other competitive economies. Without room to manoeuvre (easing monetary
policy and lowering interest rates) Britain
ended up in economic and political turmoil, with an unemployment rate of 25% and the collapse of the Labour government
who did not return to power until 1945.
Today most Eurozone countries are going through the same pain that we went through in 1929 – 1931; sharply rising unemployment, uncertainty about the banks and burgeoning public sector debts. Although the gold standard had no Central Bank and it did not float against other global currencies there are many similarities between the Eurozone construct and the old gold standard.
Today most Eurozone countries are going through the same pain that we went through in 1929 – 1931; sharply rising unemployment, uncertainty about the banks and burgeoning public sector debts. Although the gold standard had no Central Bank and it did not float against other global currencies there are many similarities between the Eurozone construct and the old gold standard.
The first similarity is
the constraint the single currency puts on currency values. Within the gold standard there was no ability
to flex exchange rates to help improve competitiveness and drive exports. In the same way the Eurozone all economies
are pegged to an exchange rate that was set when they joined; what we can now
see is that Germany had a grossly undervalued currency in 1999 when the Euro
was founded, a function of reunification, and many other countries have very
overvalued currencies – the PIIGS economies for sure! The net result has been that German exports
have thrived whilst other economies have been unable to compete.
The second similarity is
the inability to set real interest rates at sensible levels. Whilst in the gold standard Britain had to
maintain high interest rates to arrest outflows of gold to the US and other
economies, this did untold damage to our industrial base and forced up unemployment
unnecessarily. Prior to the credit
crunch the ECB set low interest rates, which encouraged personal indebtedness and
fueled an unsustainable property boom in
many parts of Europe - the prime cause of the banking melt down. Now when stagnant economies need low real
interest rates the ECB can’t deliver this as credit worthiness is negatively
impacting base rates; this means that although interest rates are set at 0.5%
by the ECB real interest rates in Italy and Spain and elsewhere are well above
5%, whilst Germany has a the advantage of ultra low rates . This inability of domestic
government to set appropriate interest rates is doing untold damage to the small business
community in the PIIGS (Portugal,
Ireland, Italy, Greece and Spain). The end result is that the rich countries get richer and the poor get poorer, no wonder the Germans and the Dutch want to keep the Euro, they are on the PIIGS back!
The final similarity is
the impact this economic straitjacket have and will have on the politics of
Europe. The final period of Britain’s
participation in the gold standard saw the employment levels drop by 3 million
following the Wall Street crash and similar level of unemployment are now being
seen in Europe with all the hardship this entails. These levels of unemployment forced us out of
the gold standard and also forced the labour government to fold. It’s quite likely that a similar pattern will
follow in the Eurozone as the politics become unmanageable for a number of left
of centre governments. Once employment
levels drop below 80% for any period of time there will be political change,
this is an immutable fact; we have seen the first signs of this in Portugal
last week and we can expect to see more of the same as austerity turns to despair.
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