Austerity politics: Echoes of 1931

ΠΗΓΗ: Economist

by Buttonwood

READING the daily headlines on Greece, a lot of historical parallels come to mind - notably the situation of Britain in 1931. Then a minority Labour government was told by a committee, headed by a City grandee Sir George May, that it needed to make public spending cuts in order to keep on the gold standard. What stuck in the craw of the cabinet was a demand to cut unemployment benefit by 20%. The government fell to be replaced by a broadly-based (but Conservative-dominated) coalition; it eventually gave up on the gold standard. Britain never returned to it. In the mythology of the Labour party, this was a "bankers' ramp" (or racket) that brought down a government.

Greece, of course, has already replaced its Socailist prime minister with a new government headed by an unelected central banker. Even he, however, depends on support from the main parties. There is just a limit on how much pain politicians will impose on voters at the behest of (often foreign) creditors.

Of course, when Britain did leave the gold standard, the results were much less damaging than the bankers feared; indeed, many economists think the move set the country on the path to recovery. It seems less likely that the same could be said if Greece left the euro; its banks and corporate sector wouild be faced with bankruptcy (their debts would still be in euros but their revenues in devalued drachmas). They would still need aid from their EU partners. However, there is an element of mutually assured destruction about this; the contagion effects on Portugal, Spain and Italy might be huge. That suggests in the long run Greece will default not just to private sector creditors but to official creditors as well; and the rest of Europe will have to lump it.