The Washington PostDemocracy Dies in Darkness

Worse than the 1930s: Europe’s recession is really a depression

Sources: Maddison Project, Eurostat

As I was arguing last week, it's time to call the eurozone what it really is: one of the biggest catastrophes in economic history.

There have been plenty of those lately. And it's not just the Great Recession. It's the way we've struggled to make up the ground we lost since. The United States, for one, has had its slowest postwar recovery. Britain has had its slowest one, period. But, six and a half years later, Europe has distinguished itself by not having much of a recovery at all. And, as you can see above, that's about to make it worse than the worst of the 1930s.

I've taken the chart above from Nicholas Crafts, and extended it a bit to put Europe's depression in, well, even more depressing perspective. Eurozone GDP still hasn't gotten back to its 2007 level, and doesn't look like it will anytime soon. Indeed, it already wasn't clear if its last recession was even over before we found out the eurozone had stopped growing again in the second quarter. And not even Germany has been immune: its GDP just fell 0.2 percent from the previous quarter.

It's a policy-induced disaster. Too much fiscal austerity and too little monetary stimulus have crippled growth like almost never before. Europe is doing worse than Japan during its "lost decade," worse than the sterling bloc during the Great Depression, and barely better than the gold bloc then—though even that silver lining isn't much of one. That's because, at this rate, it'll only be another year until the eurozone is well behind the gold bloc, too.

So how is Europe making the Great Depression look like the good old days of growth? Easy: by ignoring everything we learned from it.

Back then, there were two types of countries: ones that had left the gold standard, and ones that were about to. But that "about to" could take awhile. That's because governments were sentimentally attached to gold, even though, as Barry Eichengreen has shown, giving it up led to recovery. They simply equated the gold standard with civilization, so they were willing to sacrifice their economies for it. And sacrifice them they did. Although there were limits in extremis.

Britain, for example, refused to raise rates to defend the gold standard in 1931, because unemployment was already 20 percent. It devalued instead, and the rest of the "sterling bloc"—Sweden, Finland, Norway, Denmark, Portugal, and Canada—followed suit (silver line). The irony, of course, is that this economic weakness made them stronger. Abandoning gold let them do fiscal and monetary stimulus that jumpstarted rather rapid recoveries.

Then there were the diehards. Countries that had lots of gold, like France, could actually stay on the gold standard if they wanted to—so they did. They pushed through one austerity budget after another as offerings to almighty gold, and, for that, they paid the economic price. Now, they never crashed like the U.S. did, but they never recovered, either (yellow line). The vicious circle of falling prices, rising unemployment, and bigger budget cuts kept them in a never-ending slump. Until, that is, France and the remaining members of the "gold bloc," which, at its peak, included Belgium, Poland, Italy, the Netherlands, and Switzerland, finally gave up their Midas delusions in October 1936. Recovery followed.

As I've said before, the euro is the gold standard with moral authority. And that last part is the problem. Europeans don't think the euro represents civilization, but rather the defense of it. It's a paper monument to peace and prosperity that's made the latter impossible. So the eurocrats who have spent their lives building it are never going to tear it down, despite the fact that, as it's currently constructed, the euro is standing between them and recovery.

Just like the 1930s, Europe is stuck with a fixed exchange system that doesn't let them print, spend, or devalue their way out of a crisis. But, unlike then, Europe might never give it up. It's a fidelity to failure that even the gold bloc couldn't have imagined. And that leaves the ECB as Europe's only hope—which means they're probably doomed.

Now, to be fair, the Draghi-led ECB has done about as much as it can given its legal and political constraints. But you don't grade unemployment on a curve. And those constraints aren't going to go away, not enough anyway, to avoid a lost decade or two. Instead, the ECB will probably keep doing the bare minimum: some half-hearted quantitative easing that will stop as soon as Germany starts to grow faster.

They have made a desert, and called it the eurozone.