The euro crisis will give Germany the empire it’s always dreamed of

By Peter Oborne Politics Last updated: July 21st, 2011
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Angela Merkel greets Nicolas Sarkozy in Berlin, July 20 (Photo: AFP)

Many of the biggest losers from the Wall Street Crash were not those greedy speculators who bought at the very top of the market. There was also a category of investor who recognised that stocks had become badly overvalued, sold their shares in the summer or autumn of 1928, then waited patiently as the market surged onwards to ever more improbable highs.

When the crash came in October 1929, they felt thoroughly vindicated, and waited for the dust to settle. The following spring, when share prices had consolidated at around a third lower than the all-time high reached the previous year, they reinvested the family savings, probably feeling a bit smug. Then, on April 17, 1930, the market embarked on a second and even more shattering period of decline, by the end of which shares were worth barely 10 per cent of their value at their peak. Those prudent investors who had seen the Wall Street Crash coming were wiped out.

There was one crucial message from yesterday’s shambolic and panicky eurozone summit: today’s predicament contains terrifying parallels with the situation that prevailed 80 years ago, although the problem lies (at this stage, at least) with the debt rather than the equity markets.

After the catastrophe of 2008, many believed and argued – as others did in 1929 – that it was a one-off event, which could readily be put right by the ingenuity of experts. The truth is sadly different. The aftermath of that financial debacle, like the economic downturn after 1929, falls into a special category. Most recessions are part of the normal, healthy functioning of any market economy – a good example is the downturn of the late 1980s. But in rare cases, they are far more sinister, because their underlying cause is a structural imbalance which cannot be solved by conventional means.

Such recessions, which tend to associated with catastrophic financial events, are dangerous because they herald a long period of economic dislocation and collapse. Their consequences stretch deep into the realm of politics and social life. Indeed, the 1929 crash sparked a decade of economic failure around much of the world, helping bring the Weimar Republic to its knees and easing the way for the rise of German fascism.

So we live in a very troubling period. The situation is very bad in the United States, where ratings agencies are threatening the once unimaginable step of downgrading Treasury bonds, and Congress is consumed by partisan wrangling over raising the nation’s debt limit. But it is desperate in Europe, because the situation has been exacerbated by a piece of economic dogma.

The faith of leading European politicians and bankers in monetary union, a system of financial government whose origins can be traced back to the set of temporary political circumstances in the immediate aftermath of the Second World War, and which was brought to bear without serious economic analysis, is essentially irrational. Indeed, in many ways, the euro bears comparison to the gold standard. Back in 1929, politicians and central bankers assumed that the convertibility of national currencies into gold (defined by the economist John Maynard Keynes as a “barbaric relicâ€