6

Europe in Depression?

MILAN – Charles P. Kindleberger, the great economic historian, once noted that the Great Depression was so deep and so long because of “British inability and American unwillingness” to stabilize the system. Among the functions that the great powers failed to perform, a few should ring a bell to European leaders today. Kindleberger singled out their failure to “maintain a market for distress goods” – that is, to keep their domestic markets open to imports from crisis-stricken economies.

Surely history is not repeating itself – at least not in the literal sense. European creditor countries today are not tempted by anything like America’s Smoot-Hawley Tariff Act, which crippled world trade in 1930. Germany, the Netherlands, Austria, and Finland remain committed to the European Union’s single market for goods and services (though their national regulators hinder intra-European capital flows).

Still, one cannot help but notice similarities with the 1930’s. At the time of the Great Crash, the United States and France were piling up gold as fast as the Weimar Republic was piling up unemployment. Today’s northern European countries are running up record current-account surpluses, just as some southern European countries are experiencing Weimar-level unemployment. For Italy, Europe’s fourth-largest economy, the current slump is proving to be deeper than the one 80 years ago. Meanwhile, huge savings and potential demand for consumer and capital goods remain locked up next door.

How did this happen? As Kemal Derviş has pointed out, the cumulated current-account surplus of the Scandinavian countries, the Netherlands, Austria, Switzerland, and Germany is now around $500 billion. This dwarfs China’s surplus at its mercantilist peak of the mid-2000’s, when the G-7 (including Germany) regularly scolded the Chinese for fueling global imbalances.