There Is a Great Depression Happening In Several European Countries

Across the Atlantic Ocean, several members of the European Union are experiencing an economic catastrophe that is, for them, on scale with what the United States went through during the Great Depression.  To illustrate the depth of the pain using two examples, the unemployment rate in both Spain and Greece now stands at 27.2%.

Following the aftermath of the 2008-2009 economic crash, things would have gone back to normal.  Business cycles happen.  That’s life.  But they didn’t for a handful of countries.  One of the reasons this horrible situation is still happening is because of the introduction of a single currency, the Euro.

Consider Spain.  If Spain had its own currency, it could depreciate it by running large government deficits leading to inflation.  While painful, this would make Spanish goods cheap to the rest of the world, driving up the export volume, decreasing unemployment, and eventually healing the nation.  It’s still less than ideal – the best course of action is not to overspend in the first place so you don’t find yourself in a position of having to choose between bad and worse alternatives – but once you’re in a sinking boat, you have to do what causes the least amount of harm and damage.  You either accept a devaluation in the currency or you suffer something more horrific: Austerity.

The Euro Is a Disaster Because the Human Costs Are Too High

The problem?  I wrote about this before to describe the situation for beginners but it’s time for a recap.  These nations have debts denominated in the Euro, a currency which their legislatures do not control.  At the same time, the German economy has become such a powerhouse that it is dragging up the overall value of the Euro relative to what it would be if Germany wasn’t a member, causing the crisis to worsen even more in the poor countries which can’t pay their bills.  At the same time, Germany itself is being somewhat punished by having a currency that is undervalued relative to its economy, causing Germany to run huge trade surpluses that exacerbate the problem further!

As a result, the German people have been on the bad end of an endless stream of bailouts as their citizens have to ship money off to the countries that couldn’t manage their budgets, understandably causing resentment just like the successful adult who constantly has to get a screwup sibling out of trouble.  Meanwhile, those countries are resentful of Germany because not only are they effectively helpless to stop the problem, it is being made worse, from their perspective, by the Germany economy, which keeps firing on all cylinders and enjoys an unemployment rate of only 5.4%.

Great Britain avoided this problem, mostly because people like Margaret Thatcher waged a war against a single currency, warning that the entire nation would end up in servitude to European bankers without any means of controlling them if it were permitted.  Switzerland has avoided this problem by maintaining the Swiss Franc.  Sweden avoided this problem by maintaining the Swedish krona.

France and Germany have been much less affected by the crisis, despite using the Euro, because their underlying economies are powerhouses.  Germany has the fourth largest economy on the planet and France the fifth.

Between the two of them, they are home to Volkswagen, Daimler, Siemens, BMW, Metro, Deutsche Post, Deutsche Telekom, BSAF, ThyssenKrupp, Total, LVMH, L’Oréal, Vivendi, AXA, BNP Paribas, Carrefour, Peugeot, Renault, and Sanofi-Aventis, just to name a few.  There are still cultural issues in France that are causing very high youth unemployment but this has to do with the ridiculous barriers the French people have erected to upward social mobility, creating class warfare so terrible that the last time it broke out, they were murdering each other in the streets.

The Euro is doomed under its present structure.  The Central European banks have no ability to force the other nations to live within their means, and the nations that live beyond their means have no way to depreciate their currency, resulting in catastrophic austerity.

The Problem with Austerity

I’ve mentioned austerity twice, so I should probably talk about it for a moment.

Austerity is terrible if not done correctly.  A wonderful example of paying off the national debt is what Canada did over a 15 year period.  It decided to cut its national debt drastically.  For a decade and a half, it kept the national debt exactly the same as a small amount of normal inflation and underlying real growth in the economy increased the value of GDP.  The end result was a government debt burden that was half the percentage of GDP it had been, despite not moving hardly at all in overall dollar amount (think of it as having a $10,000 liability and seeing your income go from $50,000 to $100,000; suddenly it’s not nearly as dangerous).  It is the perfect austerity model.

If, on the other hand, someone were to try to go into a government budget and suddenly shut down programs, it is possible that you cause a negative feedback loop where the cuts drive down the velocity of money, creating more unemployment, resulting in less tax revenue, which require more cuts, which then begins to amplify on itself as the nation liquidates.  Those who don’t understand the monetary supply don’t get this.  You can’t treat a nation’s budget like you do a household budget.  Cutting expenses can, paradoxically, cause you to go further into debt.

Radical austerity also causes another, bigger problem: It is almost inevitably the breeding ground for totalitarianism.  Desperate people turn to radical hate groups, radical religion, radical nationalism, and you end up getting either bloody internal strife or the rise of a dictator.