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Hitler and Mussolini rose to prominence as a result of pro-cyclical government economic policy

Tom Hickey turned me on to this post at the Daily Mail:

‘The Nazis came to power only in 1933, as an immediate consequence of the deflationary spiral that resulted from what Mr Wolf [commentator Martin Wolf, in an earlier article] refers to aptly as the "catastrophic austerity" introduced by Bruning.’

This jives with what I understand about economic history and I have cited this as well when discussing rising economic nationalism last April. My point in that article was that the US, a creditor nation, was fighting boom time inflation and turned to ‘austerity’ to defeat it. Europe on the other hand was seeing a debt-laden deflationary episode after the Great War:

…[In the US,] 1921 was an inflation-fighting recession, not a deflation-fighting one. So the macro environment was entirely different. The potential for an extreme deflationary or inflationary spiral was much less. Weimar Germany or Mussolini’s Italy are the correct analogues from 1921…

[...]

[Dylan Grice quote] …I believe the likelihood is that over the course of the next decade or so, the trend will be towards greater fiscal problems and greater economic problems. I believe these problems will increase the temperature of debates about whose fault it all is, and that as the conclusion to these debates becomes more polarized they will play into the hands of nationalist, anti-immigrant and increasingly, anti-euro sentiment.

Again, I do appreciate a well-argued case that this is not what is likely to happen. But unless we see a multi-year recovery economy in which the nagging debt and default issues are entirely removed, economic nationalism will return with a vengeance. And that means political conflict in which the potential for armed responses is high.

As I see it now one year later, the sentiments expressed in my post still ring true, more true even. As Mary Ellen Synon puts it at the Daily Mail:

What occurs to me… is that the three top people now forcing this catastrophic austerity on the eurozone are Angela Merkel from Germany, with its history of national socialism, ECB president Mario Draghi from Italy, with its history of fascism, and IMF chief Christine Lagarde from France, with its history of collaboration with Nazism.

But, God help us, they’ve all forgotten their own history.

Source: Merkel forgets Germany’s history: ‘Austerity not inflation gave us Hitler’ – Mary Ellen Synon, Daily Mail

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

8 Comments

  1. As I said in the comment section on my post on Fringe politics in Europe (http://www.creditwritedowns.com/2012/05/fringe-politics-in-europe.html):

    “It is not austerity or cuts per se that is the problem, it is the context of these cuts. If the economy were on the right footing, you could implement austerity  as the UK proved in the mid 1990s:http://www.guardian.co.uk/commentisfree/2012/may/04/cameron-lamont-recession-early-cuts-hurtBut government economic policy is not meant to be procyclical. The problem is procyclicality, particularly in the face of high private debt.”I’ll add to that by saying, private sector debt is simply too high to be solved by government stimulus alone. That much is true – especially if there is no private deleveraging. The goal SHOULD be private deleveraging.However, government should let the automatic stabilsers do their job of attenuating the downturn and preventing worst case outcomes. (In the US, clearly those automatic stabilisers aren’t very robust though.)  Austerity i.e. adding public cuts to private ones doesn’t make sense in that context at all. But that is the path we are on in Europe. The result could be catastrophic.

    • David_Lazarus says:

      The Uk did not impose austerity in the 90′s. We had a recession at the beginning but government spending rose in every year. That is not austerity. 

      While the private sector should deleverage, and governments should simply maintain spending not increasing it or cutting it until the deleveraging is complete. Then inflation will reduce the size of the state over time. Pro-cyclical policies should be avoided. Even Minksy and Keynes talked of counter cyclical policies. 

      The US has lousy automatic stabilisers that are simply inadequate for the current crisis. Though the UK and others in Europe are eroding what stabilisers they have. 

      • The VAT rose from 15 to 17.5% from 1994. Call it what you want, taxes increased.

        • David_Lazarus says:

          Yes but the Conservatives had been switching taxes from incomes to spending as part of their wealth transfer program to support the rich, supposedly as “supply side” measures. Calling any tax increases austerity really shows the limitations of US thinking. So the US was undergoing austerity through out the fifties and sixties when it raised taxes and had the longest period of wage growth in history. The UK during that same period was undergoing austerity as it was slowly getting the war debts back down to manageable levels but we had full employment and little inflation. 

          Not hiking taxes is not stimulating the economy. Austerity is not raising taxes in isolation. Austerity is slashing spending and raising taxes far more than normal. Governments are always raising and lowering taxes to tweak the effects it is not austerity. Every year the UK government raise taxes on wines and spirits because they are not indexed and not ad valorum taxes. They are specific so have to be increased just to keep up with inflation. That is not austerity. 

      • This is what happened:

        http://en.wikipedia.org/wiki/Value_Added_Tax_(United_Kingdom) 

        During the 1992 general election the Conservatives promised not to extend the scope of VAT, but, in March 1993, Lamont announced that domestic fuel and power, which had previously been zero-rated, would have VAT levied at 8% from April 1994 and the full 17.5% from April 1995. The planned introduction of VAT on domestic fuel and power went ahead in April 1994, but the increase from 8% to 17.5% in April 1995 was scuppered in December 1994, after the government lost the vote in parliament.

        In its 1997 general election manifesto, the Labour Party pledged to reduce VAT on domestic fuel and power to 5%. After gaining power, the new Labour Chancellor Gordon Brown announced in June 1997 that the lower rate of VAT on domestic fuel and power would be reduced the from 8% to 5% with effect from 1 September 1997. In November 1997, Brown announced that the VAT on installation of energy saving materials would be reduced from 17.5% to 8% from 1 July 1998. Brown subsequently reduced VAT from 17.5% to 8% on sanitary protection products (from 1 January 2001); children’s car seats (from 1 April 2001); conversion and renovation of certain residential properties (from 12 May 2001); contraceptives (from 1 July 2006); and smoking cessation products (from 1 July 2007).

  2. Oldrich says:

    In my country (the Czech republic) the popularity of the communist party is on the rise – now according to the polls – it is the second most popular party. Now over 70 % of the people polled think that the EU is not a viable project. I think what the far-right (or fascists) now need in many European countries is to find a charismatic, “honest” leader who will channel and re-direct people’s anxieties and frustrations. But don’t worry – it will come, it is only a matter of time…-:( One opionion I have heard people say several times goes something like this …”communists deserve a chance, at least they are honest unlike the democrats who only care about cronyism, stealing public money and don’t give a damn about people”. I have even heard an opinion of people who are well-to-do say “I will vote communist because there is a necessity to clean up this mess and if the communists fail me – in the next elections I will vote far-right…”
    Overall, I feel there is much more uncertainty, anxiety, and fear among people. People are much more edgy and tense. 

    • That’s it, exactly. When the economy is in depression, the mainstream parties are discredited and people are willing to look elsewhere for answers. Someone is always able to fill this void.