Is there hope for the euro?

To readers of the following quotation, the happenings referred to therein might strike a chord as they recognise the similarity to current world events:

“Throughout the 1920s the bankers of the City of London had pursued the profitable but dangerous policy of borrowing short and lending long – and moreoverlending overseas rather than in Britain. It meant that they were highly vulnerable in the event of depositors trying to withdraw their cash, and that the only means then open to them of averting collapse would be to seek government assistance. The necessary implication that if the government were expected to act as ultimate guarantor it should also be allowed to influence in shaping banking policy had not been grasped. The bankers, notably Montague Norman of the Bank of England, worked as an independent power; it was they who made the demands on the government rather than vice-versa...” (Colin Cross – “Philip Snowden”)

The time was late 1929. As has happened in 2008 and again now in 2011, investors in the autumn of 1929 were in a critical nervous mood. On Monday, October 29, the real disaster began in Wall Street. It was a devastating day in the history of the New York stock exchange. The previous days and weeks had been highly jittery. On Monday selling started at once and in huge volumes. The New York Times industrial averages were down 43 points.

By the end of the day trading members were near collapse physically, mentally and financially. The slaughter was widespread and indiscriminate, from the innocent speculators to hugely wealthy people, not excluding also professional traders. The effects of the Wall Street Crash spread quickly first to Europe and then to the rest of the world as there did not exist then the international machinery or understanding as to how to deal with these highly volatile situations.

The great historian A.J.P. Taylor gave his own personal views as to what were the effects of the 1929 financial crisis as a prelude to World War II.

“The British government feared to offend economic principles even more than to offend Hitler. The secret of Pandora’s box which Schacht (Hitler’s first finance minister and an economic wizard) had opened in Germany and which the American New Deal has also revealed was still unknown to them. Wedded to stable prices and a stable pound, they regarded increased public spending as a great evil, excusable only in the event of actual war, and even then lamentable. They had no inkling that public spending on anything, even on armaments, brought with it increased prosperity. Like nearly all contemporary economists, except of course J.M. Keynes, they still treated public finances as though it were the finances of a private individual.” (A.J.P. Taylor – The Origins of the Second World War)

Today the world is facing similar situations. The constant nervousness of the financial markets and the indecisiveness of governments as to what solutions to adopt bode badly for the world. While governments dither and discuss and find temporary solutions that only give a short respite, the markets remain volatile and unpredictable.

The euro is especially vulner-able. With political leaders continuously defending their patch and looking over their shoulders as to the political impact of their decisions in their own countries, the situation of the euro will remain unstable. In these circumstances the euro seriously risks its own demise.

There is already talk of the small countries (Greece, Portugal and Ireland) going their own way with even hints at the far-fetched possibility of their eventually quitting the eurozone to avoid the stranglehold imposed on them by the too-stringent conditions linked to their bailouts. The extreme austerity programmes forced upon these countries would be like a vice-like grip on their economies that historian A.J.P. Taylor warned against in the quote mentioned earlier.

Germany and France, the AAA rating members in the eurozone (so far), rightly fear the collapse of the whole system if Italy and Spain default. Those who know these countries well are not so convinced that they will live up to their commitments under the austerity programmes adopted by their own Parliaments after much haggling. Both Italy and Spain are large economies in Europe and the world and their failure would send the euro spiralling out of control. To make matters worse, procrastination and indecision have, so far, been the hallmarks of the eurozone policy-makers.

These are the very same elements that had brought about the financial crisis of 1929 and the consequent collapse of the world economies. In these circumstances, the only viable decision of immediate importance to Europe is that governments of the eurozone, for once, should forget their own home political agenda, cooperate closely with one another to establish long-term policies intended to solve the crisis once and for all, and, most importantly and of an immediate nature, agree on a eurobond regime that is currently being mooted by renowned economists as the best solution for the eurozone to live up to its high expectations in the short and long terms.