Jan. 6 (Bloomberg) -- Recent growth in the euro area has
tracked the experience of much of Europe in the 1930s all too
closely. Unless policies change, this stagnation is likely to
persist. In some ways, the euro area’s prospects are more
challenging than the parallel with the Great Depression
suggests. If only things were as bad as in the 1930s -- how’s
that for a thought to put matters in perspective?
The aftermath of the Depression in Europe gives a vivid
demonstration of the power of monetary policy. One group of
countries stayed on the gold standard; others came off and
devalued their currencies. The ones that exited -- the sterling
group, made up of Denmark, Norway, Sweden and the U.K. -- could
execute independent monetary policies. Deflation stopped,
inflationary expectations went up, real wages adjusted, and
output quickly revived. The countries that stayed on gold saw
deeper falls in output and then grew more slowly for years. It
took them until 1938 to restore output to its level in 1929.
