“Incredible Europeans” have learned nothing from history

The conservative Partido Popular won the general elections in Spain over the week and PP leader Mariano Rajoy will now become Prime Minister in Spain. That makes it three – that is the number of new Prime Ministers in Southern European countries in a couple of weeks.

So the European crisis continues and as in 1931 this is to a large extent a political crisis and policy makers seem unable to learn much from the past. Here is Scott Sumner for you:

“The events of the last few years have caused me to radically revise my views of the Great Depression.  Not in terms of the causal factors, those have been amply confirmed.  Falling NGDP does create domestic and international financial turmoil—no doubt about that.  But I used to think people were stupid back in the 1930s.  Remember Hawtrey’s famous “Crying fire, fire, in Noah’s flood”?  I used to wonder how people could have failed to see the real problem.  I thought that progress in macroeconomic analysis made similar policy errors unlikely today.  I couldn’t have been more wrong.  We’re just as stupid as they are.”

I am only quoting, but find it hard to disagree. One thing is to agree with with Scott Sumner (I am used to that), but agreeing with Paul Krugman is slightly less normal for me, but here he is (and I agree):

“I had some hopes for Mario Draghi; he has just done his best to kill those hopes. In his view, it’s all about credibility, defined thusly:

Credibility implies that our monetary policy is successful in anchoring inflation expectations over the medium and longer term. This is the major contribution we can make in support of sustainable growth, employment creation and financial stability. And we are making this contribution in full independence.

Unbelievable. Right now, the ECB has too much credibility on the inflation front; the spread between German nominal and real interest rates, which is an implicit forecast of the inflation rate, is pointing to disastrously low medium-term inflation“.

Draghi also seems to suffer from a variation of the “Gold Standard mentality”. Anybody who have studied the Great Depression should find recent European events surreal. Day-by-day history repeats itself. It is tragic.

If there is any European policy makers out there reading this – you should take a look at events of 1931 – try not to repeat anymore of events from that tragic year. You could start reading my comment on 1931.

PS I wonder if Mariano Rajoy know how Spain avoided the Great Depression 80 years ago…(hint: Spain was not on the gold standard).

PPS I have been thinking – FX policy is the responsibility of EU Finance Ministers rather than of the ECB. You can draw your own conclusions.

PPPS Tyler Cown also has a comment on the European crisis.

PPPPS Ambrose Evans-Pritchard has a comment on Spain that is unlikely to cheer up anybody.

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7 Comments

  1. Benjamin Cole

     /  November 21, 2011

    Inflationary booms do not fan tensions and hatreds. Deflationary depressions do.

    Egads, this is so simple. Have the globe’s monetary authorities lost their minds?

    Reply
  2. BC, it is so incredible depressing what we are seeing in Europe right now. I don’t know whether the monetary authorities have lost their minds, but we are surely not heading in the right direction. There is absolutely nothing to be positive about at the moment.

    Reply
  3. Mariano Rajoy is a honest person, but incapable of reasoning in economics. Sadly, his economists are all of the german line, in spite that much of them have studied in US.
    The euro has not only implied an institutional change; it also has suposed an profound change of mentality not sufficently apreciated out of europe.
    This change is the worse enemy for economic & social welfare. That is why the fall of the euro would be a catastrophe: There will be no alternative model in wich to articulate the reconstruction.

    Reply
  4. … Beside that, Rajoy is very proud of his membership in the government that introduced Spain in the euro. The euro in Spain is a Taboo, no political party is capable of criticism against it. But for the PP party, it is a sacred cow.

    Reply
  1. No Nouriel, I am no longer optimistic – it feels like 1932 « The Market Monetarist
  2. 1931-33 – we should learn something from history « The Market Monetarist
  3. The painful knowledge of monetary history « The Market Monetarist

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