Pursued Economy

CHAPTER 7Europe Is Repeating Mistakes of the 1930s

The Failure of Economics in the 1930s and the Rise of National Socialism

When the pandemic-driven recession hit the Eurozone in early 2020, many elected leaders and their voters were horrified to find that they had no fiscal or monetary policy levers with which to fight the swiftest and deadliest economic collapse in living memory. That sense of helplessness had the potential to undermine the already precarious electoral support for the European Project, which first came to light with the Eurozone crisis that began in 2010.

Member states willingly ceded sovereignty over monetary and exchange rate policy to the European Central Bank (ECB) when they adopted the Euro. But they also lost sovereignty over fiscal policy—not only because of the limitations imposed by the Stability and Growth Pact (SGP) and the subsequent Fiscal Compact, but also because of the ease with which capital can flow between the Eurozone's 19 different government bond markets—all of which use the same currency.

Under this arrangement, the unique position government bonds hold in each country as the highest-rated fixed income asset denominated in the national currency is lost since there are 18 other government bonds denominated in the same currency. Having 18 close substitutes means any member government deviating from the norm established by the best fiscal performer among the 19 countries is punished by capital outflows and higher interest rates.

This loss ...