Tom Walkom writes this morning that the world economy is on the brink. As in 1931, international austerity has brought us to the tipping point:
Then, as now, the watchword among the major world economies was fiscal restraint. Government deficits were up in Canada, the United States and Europe. The overwhelming orthodoxy, then as now, was that these deficits had to be cut.
The second overwhelming orthodoxy of 1931 was adherence to the gold standard. In effect, gold was the world’s currency. Individual nations pegged their own domestic currencies to the precious metal at a fixed price.
To allow that price to vary was heresy. To exit the gold standard entirely was unthinkable.
This time around the gold standard has been replaced by the Euro. Canada, the United States and Britain control their own currencies. But the nations of Europe are caught in a straight jacket:
Eurozone countries like Spain and Greece cannot export their way out of recession by devaluation. They are stuck with the euro, a transnational currency that in terms of their economic needs is worth too much.
Even worse, they are being told they must slash wages and jobs if they wish to keep that common currency.
Understandably, the inhabitants of these hard-hit countries are loath to exit the security of the eurozone. But they are even more unwilling to pay the price of membership.
Something will have to give. As in 1931, what will almost certainly give is allegiance to an abstract monetary principle.
The questions are: What will happen when the Euro crashes and burns? And what will happen if nations such as Canada insist that more austerity is in order?
Those who refuse to learn from history are doomed to repeat it.