After nearly four years of recession, the modest American comeback seems encouraging, and a crisis of the euro currency seems a concern, but not a really worrisome problem — right?
That would be wrong.
What if today is really a throwback to 1931, when a two-year-old stock market crash shook the world economy, and Europe struggled to cope with the economic downturn?
On the European side, Nicolas Sarkozy’s month-old defeat for the French presidency by second-tier Socialist politician Francoise Hollande has restored some balance to the eurozone equation, but serious differences remain between Germany and France (and others) on what overall European economic policy should be. Although Greek politicians have not given up trying to find ways to prevent Greece’s default, the ongoing crisis highlights the economic interdependence of the EU, while simultaneously underscoring the lack of European political integration needed to provide a coordinated fiscal and monetary response. Yet in spite of the number of euro-rescue deals already agreed upon by EU leaders, market volatility persists well into 2012.
The contemporary European economic structure evolved from the original European Economic Community and Common Market, created in 1957. The 1992 Maastricht Treaty created the European Monetary Union with 27 members that began circulation of the euro in 2002. Criteria were laid out for countries that wanted to enter the “eurozone,” and 17 EU member states joined, with eight or nine other states waiting in the wings. The political price for meeting these economic criteria was too strict for countries like Italy, Spain and eventually Greece, but they were allowed to enter anyway.
These underlying pressures in the eurozone became increasingly visible after the global financial meltdown of 2007-’08. Liquidity quickly dried up, and several states were left with unsustainable debts and public debts greater than their GDP. Between the spring of 2010 and the spring of 2011, the EU and the IMF acted to bail out Greece, Ireland and Portugal after serious political unrest in those countries. Last December, the EU agreed to a fiscal union to meet these issues and establish a permanent bailout fund in July, 2012. All EU members except Britain and the Czech Republic signed on. However, Germany, the EU powerhouse, has resisted calls by European Community President Barroso to talk the next step and issue joint Eurobonds, the equivalent of U.S. Treasury bonds, to stabilize currencies in the face of rising costs.
What about the American side of the equation? Scholars argue that the panic of 1929 became a full depression because of the American Federal Reserve Board’s (the Fed) avoidable errors. Instead of easing monetary policy by cutting interest rates and buying bonds to prime the economy, the Fed tightened, leading to a catastrophic chain of U.S. bank failures, which contracted the money supply by about a third, and the U.S. economy with it. The rules of the gold standard transmitted this American shock around the world, causing the great European bank failures of 1933. Countries struggled slowly, because of the enormous war and reparation debts that weighed down the European states. Recovery came only when the gold standard was abandoned and nations focused on job creation and rearmament. As historian Niall Ferguson notes, “the country that did that most successfully was Germany. You know what came next.”
Today the gold standard is gone, but many Americans still focus on the old ways — tight money and restricted lending. Fortunately, folks who understand the problem now run the Fed, but the overwhelming majority of Americans do not. To compound the problem of European struggles for unity and policy coherence, the United States is heading into a presidential election in the fall. Both parties must deal with a new tax bill that could either harm or help our economy but also trigger international actions that could make the problem worse and turn the world toward another Great Depression.
Many, both here and abroad, have hoped that the growing Chinese economy might be able to come to the rescue of the West with large loans. But recent news out of Beijing suggests the opposite: The New York Times reported recently that a nationwide Chinese real estate downturn has stalled exports, and declining consumer confidence has produced a “sharp slowdown in the Chinese economy.”
It is hard to believe that in this “modern” world, nations can or will not get together for the greater good. But history has shown us that is not always — perhaps even rarely — the case. The wild extremes of American political dialog during the primary season and the defeat or retirement of moderate politicians who can make healthy bipartisanship makes many Americans uneasy and bodes ill for the whole planet. It causes us to question ourselves, as well as others. Unless we can elevate our own national economic dialog to a point where we can deal positively and, with healthy, democratic manners, accept the reality of the really hard issues that face us — equitable taxation, medical care for our citizens, balanced economic incentives, food availability and cost — we will ultimately face, if not trigger, a crisis of global and national governance. Savage, viscous political campaigning under such circumstances will ultimately cost us more in fiscal and human treasure than we could ever imagine now — when our economy is again becoming shaky as a modest turnaround shows some signs of crumbling, JPMorgan Chase owns up to a $2 billion blunder, and our overseas military commitments are being retrenched.
John D. Stempel is Senior Professor at the University of Kentucky's Patterson School of Diplomacy and International Commerce. He was director of the school from 1993-2003. He served as Associate Director 1988-1993, coming to U.K. following a 24-year career in the U.S. Foreign Service.