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Europe’s Prospects Looked Better in 1930s

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.