Europe's terrible blunder can be rectified. Remember 1931

http://www.guardian.co.uk/commentisfree/2012/apr/24/europe-terrible-blunder-single-currency?newsfeed=true

The
Guardian
24 April 2012
  Europe's terrible blunder can be rectified. Remember 1931

The euro was a blood sacrifice to the Eurocrats' fanaticism. But Europe's
democracy may save us from Europe's single currency
<http://www.guardian.co.uk/profile/simonjenkins>

Simon Jenkins <http://www.guardian.co.uk/profile/simonjenkins>

I write from America, where those who care about Europe ask one question
only. What the hell is going on? What is this "euro crisis" that never
seems to end? What has happened to Greece, Portugal, Italy, Spain, Holland and
now France<http://www.guardian.co.uk/world/2012/apr/12/france-presidential-elections-debt-fears>?
Have we all gone insane?

The economist Paul Krugman has one answer. He suggests that Europe is
now replicating
the 1930s "in ever more faithful
detail<http://www.nytimes.com/2012/04/16/opinion/krugman-europes-economic-suicide.html>".
Governments, he says, are "committing economic suicide". When every
economic tenet cries for treasuries to restore growth, spend, stimulate,
inflate and rebuild confidence, they are advocating ever more austerity and
balanced budgets, forcing their economies towards recession. They are doing
so not because they believe austerity will generate growth. They are doing
it because they are imprisoned in a defunct dogma, the propping up of the
euro.

Nothing is more eerie than to read accounts of Europe's economy between the
world wars, notably the idealistic
"Locarno<http://www.thenagain.info/webchron/World/Locarno.html>spirit"
year of 1925. It was then that the chancellor of the exchequer,
Winston
Churchill, returned Britain to the gold
standard<http://news.bbc.co.uk/1/hi/events/budget_99/budget_briefing/279928.stm>.
Wages would be forced down to compete with America, and Europe's prewar
economic stability would recover. Keynes pleaded that this was madness. The
pound was 10% overvalued against the dollar and the outcome would be
"crippled exports, unemployment and strikes".

Churchill was wrong and Keynes was right. Six years later, a minority
Labour government hit financial collapse and failed. In the summer of 1931,
with capital fleeing the country and bankers wailing for austerity, a
coalition national government was formed and abruptly came off the gold
standard. The pound slid from $4.85 to $3.40. Despite forecasts of
catastrophe, Charles Mowat's classic history of the period records that "hardly
a leaf stirred"<http://books.google.co.uk/books?id=3dgOAAAAQAAJ&pg=PA404&lpg=PA404&dq=Charles+Mowat+hardly+a+leaf+stirred&source=bl&ots=luAF1bB9Gg&sig=KR4yDjgDPX_n6lFd3qpE_v_K_LI&hl=en&sa=X&ei=UtGWT-nXLcja8APc1dDgCQ&sqi=2&ved=0CB8Q6AEwAA#v=onepage&q&f=false>.
There was no revolution in the streets, and devaluation aroused no more
interest "than that of a passing sneeze". Within four years British
industrial production had risen 25%, while unemployment fell from 3 million
to 2 million.

History rarely repeats itself, but its lessons do. The Bank of England and
Treasury are trapped in similar orthodoxy to that of their prewar
forebears. They hold that inflation is the greatest curse that can afflict
the British economy, even as they mastermind the greatest collapse in
demand that Britain has suffered since the war. When they do agree to print
new money as quantitative easing, they dare not let it leak into
consumption for fear of inflation. They do not flinch even when a quarter
of high street shops close. They are like doctors laying the sick in the
snow to see who will survive. Yet they hurl cash at friendly bankers and
watch it vanish into the maws of directors and offshore speculators. And
they dole out billions to prop up a euro of which they are not even members.

Keynes was right in 1925 – and proved right in 1931. Flexible exchange
rates are a more painless way of forcing down labour costs and promoting
trade than government austerity. Inflation is a better way of easing debt.
The remedy for depressed demand is increased demand, simple as that. The
risk of inflation in Britain at present is trivial compared with that of
deflation and recession. And at least Britain's currency can float. Imagine
if it were part of the euro and trade had to cope with a pound probably 20%
higher in value than now.

Hardly a month passes without another euro crisis and more imposed
austerity. It is as if Keynes had never lived. Yet water still refuses to
flow uphill. Heavily indebted countries certainly need to restructure their
public sectors in the long term – and have plausible plans to do so – but
they cannot repay debt, short or long term, when they are in recession.
Increasing unemployment and suppressing demand impedes growth and is no use
to anyone.

Worse, Europe's drawn-out austerity is undermining the very authority
required to enforce it. When governments fall, no package can be
enforced. Greece
was forced last month into de facto
default<http://www.guardian.co.uk/business/2012/mar/09/greek-deal-default>.
Who would now buy a Spanish bond? What is the value of a Dutch finance
minister? What price Nicolas Sarkozy's signature on a bailout deal? As long
as the euro shackles the continental economy in austerity it will never
achieve political stability or a return to growth.

The euro was a Locarno dream. It was the last cry of the 20th century,
envisaging a brave new order in which bankers and businessmen, workers and
peasants, would stand arm in arm, singing Ode to
Joy<http://www.youtube.com/watch?v=nZJ1Tgf4JL8>.
All labour costs would become equal. There would be fiscal and regulatory
integration across the entire continent. The euro would unlock the door of
a united states of Europe. Ireland and Greece would be to Germany what
Nevada is to New York. The euro would squeeze and stretch the peoples of
Europe until they were one.

This concept of union must rank among the great mistakes of history. Like
other pan-continental visions, it has proved no match for the crooked
timber of European mankind. Its acolytes cannot bear revisionism or
tolerate dissent. They have driven Greece into chaos and Spain into severe
depression, with half its youth now
unemployed<http://www.guardian.co.uk/commentisfree/2012/mar/14/spain-labour-law-changes-unemployment>.
The Eurocrats do not care. Their incomes are secure. They dance only round
the euro and claim its blood sacrifice. They will do anything but admit
they were wrong.

The one salvation on the horizon is democracy. Last week the French
electorate said no to more austerity and the Dutch government fell for the
same reason<http://www.guardian.co.uk/business/2012/apr/23/eurozone-crisis-austerity-dutch-government>.
Spain faces a similar crisis, and the streets of Athens hold untold
dangers. Even in Britain polls suggest an electorate unconvinced by the
longevity of what by any standards is mild austerity. The peoples of Europe
have had enough. The prospect of imposing on its nations the budgetary
disciplines required for more German bailouts is unthinkable.

Europe needs a simple, overnight, collective reordering of debts, defaults
and currencies, along the lines of the postwar Bretton Woods
deal<http://news.bbc.co.uk/1/hi/7725157.stm>.
Euroland must shrink drastically, and floating currencies be restored. The
slate must be wiped clean. A terrible mistake was made, but it can be
corrected as in 1931. As then the pundits will predict disaster, but I
would bet the opposite. After the adjustment, "not a leaf would stir … no
more than a sneeze". We would then return to sanity.
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