The Washington PostDemocracy Dies in Darkness

Europe’s Greater Depression is worse than the 1930s

Europe hasn't recovered, because it hasn't let itself. Too much fiscal austerity and too little monetary stimulus have, instead, put it more than halfway to a lost decade that's already worse than the 1930s.

It's a greater depression.

And as the latest GDP numbers show, it's not getting any less so. Indeed, the eurozone as a whole didn't grow at all in the second quarter. Neither did France, whose economy has actually been flat for a year now. Germany's economy fell 0.2 percent from the previous quarter—and that after revisions revealed it had quietly gone through a double-dip recession in early 2013. Though that's still much better than Italy: Its GDP also fell 0.2 percent, but its triple-dip recession has now wiped out all growth since 2000. The closest thing approximating good news was that Spain's dead-cat bounce recovery continued with 0.6 percent growth. But it still has 24.5 percent unemployment.

Here's a bit of perspective: it's been six-and-a-half years, and eurozone GDP is still 1.9 percent lower than it was before the Great Recession began. It "only" took the U.S. economy seven years to get back to where it'd been before the Great Depression hit.

But it's a little misleading to just call this a depression. It's worse than that. Europe is turning Japanese. The combination of zombie banks, a rapidly aging population and, most importantly, too-tight money have pushed it into a "lowflationary" trap that makes it hard to grow, and is even harder to escape from. That's what happened to Japan in the 1990s, and now, 20 years later, its nominal GDP is actually smaller than it was then. Now, Europe isn't that far gone, but it's getting there. Inflation is already a meager 0.4 percent. And you can tell that investors don't think it's going to pick up anytime soon, because they're willing to lend to governments for almost nothing. Indeed, for the first time in its history going back to the Napoleonic era, Germany (or one of its predecessor states) can borrow for 10 years for less than 1 percent. Japan, of course, has been able to borrow this cheaply for a decade now.

Europe needs inflation, and it needs it now. It would lower debt burdens, and make it easier for countries to regain competitiveness, both of which would increase growth. The European Central Bank (ECB) knows this, but it hasn't been able to do enough about it because the Germans are so opposed. They have a haunting fear that somewhere, someone may get away with breaking the rules by inflating their problems away. That's why the ECB will probably wait until it's almost too late to start printing money, and even then, only do it half-heartedly. It'll be enough to keep the euro from falling apart, but not their economies.

The euro is the gold standard with moral authority. And that last part is a problem. Both are fixed exchange rate systems that can turn a recession into a depression, because they make countercyclical policy impossible. But people are even more attached to the euro today than they were to the gold standard then. Now, in the 1930s, people equated the gold standard with civilization itself, and were willing to sacrifice their economies for it. Double-digit unemployment, though, eventually cured them of this sentimentality—and recovery followed. But that hasn't happened in Europe in recent times. That's because the euro doesn't just represent civilization, but the defense of it, too. After all, the past 60 years of civilization have all been about making sure it never happens again. Europe's leaders aren't going to give that up because of a little thing like a never-ending slump.

So this greater depression will only get more so.