Europe’s Periphery: A postmodern version of Britain in the 1930s?

While it is quite correct to draw parallels between the Crashes of 1929 and 2008, it is important to distinguish not only between the two eras but also between the different experiences of different nations within the same era. The simple, but not insubstantial, point of this post is that Europe’s Periphery is not in the same boat as the United States, or Britain, today; just like Britain found itself in a different kind of pickle, after 1929, compared to that of the United States. Moreover, keeping in mind these differences is important in order to devise strategies for dealing with the Crisis.

Take Britain in the post-Great War period, that eventually led to 1929 and the Great Depression. From the Great War’s end, Britain was experiencing diminishing investment and profitability. Having returned soon after the War to the Gold Standard, and at an exchange rate that was too high, Britain spent the 1920s trying to defend that high exchange rate by means of high real interest rates. So, on the one hand investment was bleeding away while, on the other hand, interest rates were being kept artificially high, in the context of maintaining the folly also known as the Gold Standard. The result was that Britain was riding a recessionary tide well before 1929 hit.

In sharp contrast, the United States was experiencing a boom, courtesy of the creation of the first web-like vertically integrated conglomerates (Edison, Ford etc.) whose financing required the first spate of large scale financialisation. The resulting cycle of high monopoly profits, low interest rates and high growth gave rise to the speculative bubble that burst so catastrophically in 1929. When that happened, the US and the British economies were hit just as hard. Nevertheless, the difference between the two experiences of the same Crisis was that, unlike the US, which never saw the recession-cum-depression coming, Britain was already tasting the bitter grapes of a slowdown in advance of the banking sector’s implosion.

Cut to the two decades preceding 2008: On the back of the tsunami of capital that was flowing into Wall Street daily, in order to finance the US deficits, which were in turn keeping the world exporters’ in business (thus closing the recycling cycle that I have described as the Global Minotaur), interest rates in the US were extremely low and financialisation proceeded more or less as it  had done in the 1920s. The bubbles were, this time around, larger and more menacing (as Wall Street and the City of London were aided in their credit creation spree by massive computing power and exorbitantly complex derivative contracts) and, so, when these burst, the black holes that the taxpayer had to fill were bottomless. However, this time, Britain was more or less on the same page as the United States: unencumbered by a common currency (i.e. the Gold Standard in 1929 or the euro in 2008), Britain followed a similar trajectory to that of the United States: Massive bank bailouts that doubled public debt, partial nationalisation of banks, infinite support for the banks’ bondholders, and next to no relief for the ‘little’ people caught up in the cogs of negative equity, unemployment, poverty. Burnt by all their other investments, investors flocked to buy Treasuries and Gilts, keeping American and British interest rates at all time lows.

Meanwhile, Europe’s Periphery ended up in a situation not dissimilar to that Britain had found itself in in 1929. Just like Britain in the 1920s, Europe’s Periphery had entered into a currency union at a daft exchange rate. Moreover, to secure entry into that eurozone in the first place, each and every one of these nations had to impose upon itself a hidden, slow-burning recession: reductions in real wages and a substitution of investment away from manufacturing toward import-heavy services and real estate development (especially in countries like Ireland and Spain, or public works in places like Greece) were the price of admission that they paid.

Once inside the common currency, investment (excluding real estate development) began to fall rapidly, labour unit costs to rise, and the only thing that stood between them and a run on the countries’ bonds (the equivalent to a run on their currency once they had given up their currencies)  was the ‘exorbitant exuberance’ of the large foreign banks which kept flooding the Periphery with the loans that masked the underlying recessionary process.

In short, just like Britain before 1929, Europe’s Periphery was being secretly buffeted by a slow-burning recession (which did not show up in their national statistics, courtesy of real estate, white elephant developments and unlimited credit) well before 2008. Labouring under an overvalued currency, their industries were being depleted in exchange for phoney growth in real estate and finance. And when the Crash of 2008 burst these bubbles, Europe’s Periphery, unlike Britain and the US, found itself in a situation very close to that which Keynes was trying to study in Britain in the 1930s.

As we all know, Britain responded quite swiftly, after 1929, by being the first to abandon the common currency (i.e. the Gold Standard) that was dragging it down years before the Crash. Today, the Periphery cannot do this. We no longer have currencies that we can de-link from Gold, from the dollar, from a foreign means of exchange and stock of value. Recreating currencies from scratch will be the equivalent of tearing down the European Union and all it symbolises , both economically and politically.

So, how should the Periphery respond to its existential crisis? Continuing with more loans and deeper austerity is, obviously, just as clever as it would have been for Britain to remain in the Gold Standard after 1929, and to try to ‘cut’ itself out of the Depression by putting the full magnitude of the adjustment’s burden on already impoverished working people. [This is precisely why the current debate on the size of the toxic EFSF-ESM is besides the point.] If the Periphery’s social economy is to survive, and not to turn into a desolate desert, deep structural changes are necessary within the eurozone. To those that suggest the ‘federal move’ as the ‘solution’, my reply is: Dream on! Even if the political will for more federation was in situ (which it is not), the process that would take us there is bound to be outpaced by the Crisis’ onslaught.

 So? What should we do? It is my considered opinion that the only option that Periphery has that is today’s equivalent to Britain’s early exit from the Gold Standard is not an exit from the euro but a few decisive steps that will utilise existing EU and Eurozone institutions to unify the eurozone’s banking sectors,  a large portion of eurozone public debt and, last but not least, aggregate and disaggregated investment strategies. In short, we need something like our Modest Proposal – click here and here.




    • Yanis,

      Thanks you for your posts, I have read your book [The Global Minotaur] and your articles for more than a year. You are one of the last few voices of common sense and realism about the situation in Greece and that’s why -in my opinion- you have been kept out of the debate by the greek mainstream media…

      In combination with your last articles in about Greek Libertarians, Keynesians and Marxists paradoxes I am pessimist about the situation in Greece.

      I don’t think there is such a kind of a political party today in Greece to endorse the necessary strategies so as not only to release the country from the vicious cycle of debt, but also to boost development and fight corruption. Honestly, I don’t know from the first hand what’s the situation in Europe about all these… I think, may be better than Greece but still inadequate.

      So, the question is, if nothing changes, if Greece and the rest of Europe continue this strategy of madness for the people and of great prosperity for the elites, economically what comes next?

      Is it viable -in economic terms- this way for the elites?

      Many times you have mention a forthcoming bubble in China’s real estate market… Others predict a new oil crisis because of Iran.
      Do we live again in a context simillar with the 70s, when US elites decided to create a petroleum-economic crisis so as to take back advantage in global competition?
      Is the globalized debt going to blow up globalization?

      I ask these questions as a political scientist who wants more economic tools to figure out the political image that will come next. I don’t ask for a yes or no reply. I know that -scientifically- asking such a think would be extravagant, but have some of these I mentioned before a potentiality to come true?

      Thank you!

  • Yani:

    Might I make a suggestion?

    Since the size of the problem (European crisis) and the word “modest” represent sort of a mismatch, might you call your proposal:

    . The Self-Evident Proposal
    . The Obvious Proposal, or better yet
    . The Winning Proposal

    There is some inherent need here to carry through the important message which is that your approach will do the job and as such it can no longer be considered a “proposal” or an item of modesty.

    It has now become required curriculum (to put it in academic terms) for obtaining the grade needed for graduating the crisis class. It’s the solution book, the dummies guide out of the crisis; the codex of intelligent action.

    I am sure you get the drift. An effective brand name that underscores the essence.No modesty needed in saving Europe; fortune favors the bold.

  • Yanis,

    What was the fate of all the financialisation of the 1920’s. Was it all unwound? Could we see a similar implosion of the CDS and synthetic CDS and CDO markets this time around?


  • It is, imho, not the common currency or gold/whatever standard which is the problem. The problem is that losses are not taken by people in power doing the bets/criminal activities but are transferred to others. Devaluing is the same thing as “austerity”, it just looks different. Losses are still transferred, perhaps distributed slightly differently over the powerless others.
    The losses of theft are finally taken by the powerless/public when the thieves are safely gone with the stolen goods, never to be returned. And then economists pound their chests how good a solutions they came up with.

    • mich, this is the CRUX of the matter; it is the dead center of every issue surrounding the “boom/bust” of “Capitalism” and of “finance” and of “economics” and of “monetary” policy. The externalization of loss by the .01% and their .99% agents through centuries — into the laps of the 99.9%. It is the crux “that dare not speak its name.”

      The COST of CAPITALISM is SLAVERY, most recently exemplified by the the Apple-Foxconn expose. This stark truth and its rationalization are explained clearly in: “FRUITS OF MERCHANT CAPITAL: Slavery and Bourgeois Property in the Rise of Expansion of Capitalism” and “THE MIND OF THE MASTER CLASS: History and Fiath in the Southern Slaveholders’ Worldview” by Elizabeth Fox-Genovese and Eugene Genovese.

      Can there be “Capitalism” in which the .01% eat their own losses? If so, let us proceed with “Just Capitalism.” If not, let’s move on.

    • DrBernard you are merely saying that we dont have capitalism.When losses are transfered to people other than the ones who are accountable for them,you simply dont have capitalism.One of Capitalism’s fundamentals is risk and return.When you take this aspect off,then you dont have capitalism,you have something else.

      So my suggestion is that we shouldnt ask for “Just Capitalism” rather we should JUST ask for capitalism.

    • “So my suggestion is that we shouldnt ask for “Just Capitalism” rather we should JUST ask for capitalism.”

      This is the best sentence posted on this blog for weeks.

  • I have been reading your post here and in protagon for some months now. I thank you for sharing with us a profound overview of the globalized economy. But …
    Capitalism is bound with bubbles and crisis as you have mentioned again and again.
    I would like to share my belief with you, that such proposal : modest proposal , can only be imposed by democracies all over Europe. NOT economic/politic elites. I am convinced that the majority of people in Europe will opt for such proposal. But not the banks or their governments.

    If my belief is correct, the only option for this proposal to be accepted is through convincing the “average” european. And i really mean the public opinion, not the elite groups. In a way exactly what you do all these months. You must find a way to make your speech more “popular”. Enough with scientific exactness.

    Democracy can be laughed at by intellectual elites. But reality dictates otherwise. What you say is much more accepted, and makes much more sense to common people than to financial “experts”. Such proposal, in my opinion, can be chosen only through elections and democratic procedures. Personally i am convinced, that public opinion is thinking much more wisely than “experts” nowadays.

    • Thanks for your kind words. Of course I am in complete agreement with you. We need to speak to the northern electorates, over and above the heads of their leaders.

    • What about regularly translating your blog into German?
      (And don’t tell me, who would do that…)

    • Ilias, you argue, “Personally i am convinced, that public opinion is thinking much more wisely”. I ask, what evidence can you present to defend your argument.

      In Germany, the voter wants less Europe, not more. According to a recent poll, 70% of German voters didn’t even want the recently passed enhanced bailout fund to be executed. An even larger percentage opposes Euro bonds.

      Why can’t so many of you accept that the Eurozone is a flawed enterprise, that the best path for the working and middle-class of southern Europe is the dissolution of the Eurozone?

      Recall what so many economists said about Argentina. Domingo Cavallo argued that if Argentina left the dollar, it would implode and never recover. Instead, it prospered moreso than any other country in Latin America over the last decade.

    • @ Jim

      You are right Jim. A great majority of greek people didn’t want the bailout as well. And german people are right (in my opinion) resisting the “bailout” for Greece and the other countries next to fall. Don’t get me wrong.
      What does that make me sound? Nuts?
      Well not exactly.
      I ll try to explain my view but not in great detail. And then i ll mention to you my impression that leads to my conviction.

      Europe countries compliment each other. (Perhaps a mistake in the formation of Europe is exactly that : countries are forced to act in the same way == a football team with 11 goal keepers never wins) .
      In economic terms and geo-strategic terms (There are many many reasons to argue about that, but not here). It is in their interest as a whole to co-operate with each other. If they manage to do so, the gain for all of them ( the sum) will be greater than summing the gain of each country as a unit.

      Why don’t they do it then? Are they stupid?

      The best descriptive and simple explanation i have heard is from Mr Lygeros. Take football for instance. It’s a game based on co-operation. The players of one team, they are supposed to co-operate for the benefit of the team. But they don’t usually. Some times, a player feels that doing the extra effort will be better for the team instead of passing to a near by player. Perhaps, he doesn’t trust the other guy. Perhaps the other player is not active enough in order to be seen as an option. So on and so forth. The point is that even players of the same team don’t behave always in a reasonable or predictable way. Even if the goal is common.
      This happens to all games where a group of people is supposed to act together towards a common goal.

      Continue in the same route as it is. Absolutely not. Europe is not sustainable in this way. Fix the core problems and walk a viable path, even with struggle.
      Yes? No?

      By talking with lots of friends of mine, German, English, French and Greek. Through conversation, not agreeing in many parts, my overall impression is positive.
      They all agree about the incompetence of the current political regime. They all agree that banks play a dubious role. They all agree that the current route is a dead end. And we all prefer to part away if nothing changes.
      But … they all agree that Europe as a whole stands a better chance in the difficult times ahead.

    • And believe me, if a greek guy as I can have such a view at this time !!!
      Then the chances are that german people can think the same.

    • Modest proposal of Mr Varoufakis, which i think it would be better to read it yourself than me explaining, is not a “Eurobond” which takes the debt off greek people and puts it on the shoulders of german people. It’s a type of “Eurobond” that takes advantage of the credibility and potential of Europe as a whole and sharing the burden correspondingly. Magic?
      No, all you must consider is the global dynamics of economy, something that german financial elite has failed to grasp, unfortunately.

      Is this politically feasible? Is public opinion ready for such option? I don’t know. But history is not pre-written.

    • And people are wiser than political elite, exactly for the reasons you said. Most germans don’t want more of this solution. Most greeks don’t want more of this solution. And they are absolutely right.
      Where as the political and financial elites, are trying to impose this “mess” .

    • “Modest proposal of Mr Varoufakis, .. , is not a “Eurobond” which takes the debt off greek people and puts it on the shoulders of german people. It’s a type of “Eurobond” that takes advantage of the credibility and potential of Europe as a whole and sharing the burden correspondingly. Magic?”

      Wow, a free lunch! If this is possible without a cost to Germany (and others) why has it not been invented as a financial product yes? There are more than 2 to 3 people looking to optimize risk return in the world…

  • The approach recommended in this article may apply to other countries of the Periphery but Greece is different.

    Greece is – according to the World Bank/IFC – by far the worst place in the EU for doing business (#100 worldwide; between Yemen and Papua New Guinea). And – according to Transparency International – Greece is by far the most corrupt country in the EU (#80 worldwide). Finally, Greece just recently set the precedent of implementing a law with retroactive effectiveness, one of the most effective ways to scare off foreign investors.

    All romantic illusions notwithstanding, there is no way that an entire country can change the above within a short period of time. To change value structures takes years (if not generations).

    What Greece could/should do (and which would show results immediately) is to establish Special Economic Zones where the business framework is such that they would rank #1 in the above two indices. Then foreign money would flow voluntarily and in large volumes for investment there. And while this happens, the rest of the economy can be reformed gradually.

    These are measures which Greece, and only Greece, can implement. Others can/should help but Greece has to do the job.

    Why Greece should worry about what happens in international capital markets escapes my understanding because Greece has been taken off the markets for some years anyway. If the present debt structure doesn’t work, there will simply be another one (and another one) but all of that has very little bearing on the need that Greece starts working on its own problems.

    I see marvelous initiatives for self-help on the part of individuals and local groups (“return to the country”, potato movement, new “local currencies”, etc.). It is high time that Greek leadership and Greek brainpower learn to do what common Greeks are already doing!

    • I agree completely, Klaus. However, there is no chance at all of this happening when the Greek political elite consists of (at the highest level) people who have done nothing for their whole lives (Karamanlis, Papandreou, Samaras) other than political parasitism; of others who got their posts through political connections, even within universities, and published ****all and did even less research; and a third class who seem view politics as a refuge for failures and social misfits. Which of these groups can innovate? Or even understand the need for it?

      Greece needs a real revolution, as opposed to the spurious revolution backed by the Great Powers: such a revolution can come only from the people, but I don’t see it happening. People complain all the time, but there is no strategy, no vision of reform. Just complaints that they have less money than before.

  • YV, along with your Immodest Proposal to be presented at the INET conference in Berlin this April, please propose an Immodest Proposal–one broached decades ago by radically different thinkers in England. This was around the time that Estate Taxes were so high, that the Old Guard Nobility/Aristocracy inheritors of Real Property by the “Right of Primogeniture” designed to monopolize wealth from generation-to-generation were forced to “give tours” of their properties, or turn them into B&B’s and “hotels” just to be able to keep the tax payments and expenses up.

    And here was their “radically immodest proposal” that got to the dead center, the crux, of the matter of the POTENTIAL for JUST CAPITALISM: the abolition of inheritance of real property. That’s right: Capitalism with the prohibition against inheritance of real property, indeed against the transference of real property from one generation of DNA to the next: property monopolized by the first-born male through the Right of Primogeniture–which ENSURES birth-preference for males in perpetuity and all but guarantees entrenched misogynistic policy, from family to corporation to nation-state through global empire (see George Lakoff for “How it Works”).

    Capitalism with a fresh start for New DNA from era to era, now that would be a “NEW” idea in accord with radically “New Economic Thinking” at the 2012 INET conference, wouldn’t it, Yanis Varoufakis? And if YOU or some other speaker at the Conference did not dare to present such an Immodest Proposal, perhaps this could be brought up at some “Square Table” discussion afterwards?

    There are NO White Knights in shining armor coming to the rescue of humanity. It is only WE the People of the World, the 99% and our Humane Leaders of the 1% who can “Save Capitalism” by INTERNALIZING back to the .01% the losses incurred by the .01% by their .99% Agents; and by prohibiting the INTERNAL transfer of real property from generation to generation of the .01% by gift or inheritance, in a JUST CAPITALIST SYSTEM, from local levels to national levels unto global levels.

    Who at the INET conference in Berlin will dare to make this bid for a truly *JUST CAPITALISM” — which shall mean: “CAPITALISM WITHOUT CRIME”? Please bear in mind that THEFT is a CRIME whether the theft be deemed “legal” or not.

  • The end of Frau Horribilis is near.

    “Hollande would win the decisive round of elections with 54 percent, compared with 45 percent for the incumbent president, according to the poll. Support for the Socialist Party candidate declined by 1 percentage point from the March 18 survey.

    French voters will pick their president for the coming five years in two rounds of votes. The two winners of the 10- candidate first round on April 22 will square off on May 6.

    Hollande has consistently led Sarkozy in second-round polls since he declared his candidacy last year. The Toulouse killings last month, in which a self-proclaimed jihadist murdered seven people, including three children, “helped strengthen Sarkozy’s presidential image but doesn’t appear to have brought gains in the electoral plan,” LH2 said in today’s statement.”

  • We have here one problem that is a problem of all western countries including Greece, and one problem specific to Greece and some other countries.
    The firm as empire. The large firms are today like a Soviet Union of yesterday, with a Stalin as president and the directors as the politburo. The practice of shareholders electing the officers of the company is the same illusion that members of politburo were elected. There is a small difference that the Soviet empire was local. The firm empires are international. The president and the technocrats of the firm can live in whatever country they want. They can buy politicians, judges, police etc. They can change the laws of any country to derive advantages like not to pay taxes or almost not to pay taxes, they can change the laws to be allowed to pollute etc. The tax code of the USA is about 14000 pages. Most of the code is bribes encoded in law. Only in USA the firms have 2 trillion dollars in cash which are doing nothing, they are just waiting to find usage. By using that amount of money, they can create more jobs that are unemployed folks in USA. The folks that control the Wal-Mart can hire the army of a country the size of Greece for 90 years. Trying to analyze problems though economy is futile. These are not economic entities, these are empires.

  • BTW, in case you are wondering what Finance EU Ministers do all day in Brussels?

    A: Nothing.

    And where is the Greek Finance Minister?

    A: What’s that?

  • I mean, this is deep down scary.

    Watch these, some of the lowest IQ people, conducting our finance affairs in Europe.

    Try to pick up some of the gossiping too….where did they find these people? And the Dutch minister who seems to be in need of an urgent austerity himself….not to mention the Danish hostess that she thinks she is running a hotel or a spa of some sorts…SCARY! SCARY I tell you!!!!!!!

  • What’s so good about EU that could not be maintained in a return to national currencies (not from scratch, but in an ordered way)?

    Is it possible to specify?

  • BTW, this is primarily for the German audience which loves nicely compiled reports and statistics.

    Please click on Executive Summary of this McKinsey report examining the debt and deleveraging of both mature economies and Euro-zone crisis countries.

    Please refer to Exhibit 4 of Page #5 of the Executive Summary titled “The composition of debt varies widely across countries”.

    Could you kindly explain to us why Greece has been chosen for this malexperiment in austerity when Greece is much lower in its total debt to GDP ratio than Japan @ 512%, UK @ 507%, Spain @ 363%, France @ 346%, Italy @ 314%, South Korea @ 314%, USA @ 279%, Germany @ 278%, Australia 277%, Canada @ 276%, Ireland @ 663%, Portugal @ 356% and Italy @ 314%?

    In comparison, Greece stands in its total debt (Household+nonfinancial corp+Financial Institutions+Government) @ the lowest of all above at 267%.

  • “today’s equivalent to Britain’s early exit from the Gold Standard is not an exit from the euro but a few decisive steps that will utilise existing EU and Eurozone institutions to unify the eurozone’s banking sectors, a large portion of eurozone public debt and, last but not least, aggregate and disaggregated investment strategies”

    Okay. But what if this option also meets a definitive “Dream on!” reply. At that point, does exiting the euro make sense? Or do we just wallow in misery permanently?

  • Ilias @3:55 and Jim,

    You said,
    “By talking with lots of friends of mine, German, English, French and Greek. Through conversation, not agreeing in many parts, my overall impression is positive.”
    I’ve had the same experience many times – Sunday night at friends in St Valaire, 5 nationailties at the table, all agree the system is corrupt and broken, but no idea how to fix it. There may be ways other than Yanis’ MP, but I’m not aware of them – and I’ve searched high and low. To understand the mess made by the “financial” oligarchs is easy – to understand why it is being addressed so dishonestly by politicos is extremely disheartening for anyone who values democracy. As someone said here, they “ignore” democracy. Bankers have probably always dreamed and schemed to take over the world, since at least the time of the d’Medicis. And they’ve succeeded to an amazing extent more than once. This time, unfortunately, they own our govts… again. And they are not going to have capitalism in any form except crony if they can prevent it. They wish to liquidate the world, especially labor, and put all the money in their own pockets. SEems silly, but greed makes men mad, and that’s their intent – bank cartel capitalism if you will. Sick…

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