Pictures of tragedies

In his post – Europe´s Second Depression – Krugman writes:

Aha — in my post on Europe’s policy failure, I somehow failed to notice that the new Maddison dataset provides per capita real GDP, which means that I should use per capita GDP in looking at the current crisis. And my point about dismal performance gets even stronger:


Europe in 2013 has recovered worse from its slump than Europe in 1935. Again, great work, guys.

So I decided to make a per capita RGDP comparison among a small set of significant economies: US, UK, France & Germany both in the 1929-39 and 2007-12 periods. “These are their stories” (Note: within each period the scales are the same):


In the “Great Depression” the US tumbled much more than the others. Britain was the first to leave the gold standard (1931)(color-coded dashed bars) and recovered sooner. France only left the GS in 1936. The US in 1933 but had a recession within the depression in 1937-38 courtesy of the Fed and Treasury misguided policies.

What about Germany? Hitler comes to power in January 1933 and almost immediately begins the war build-up. It has the strongest recovery.


Flash-forward to 2007-12. This time around Britain does worse. After seeing real incomes fall more than in France, monetary freedom in the US allows a comeback and avoids a recession within the “Great Recession” that befalls the UK and France. But all in all, a pretty lame performance:


What about Germany, ‘leader of the euro zone pack’ where many countries are ‘under water’?


How can that be? While others are now ‘diving’, it has only registered a slowdown. This is additional evidence that policy, in particular monetary policy,  has been effectively geared to German needs. And we know that Germany imposes its fiscal policy on the ‘others’.

So it´s a mystery why a ‘free country’ like Poland would wish to join!

Tragedies_6Note that Poland has it´s own scale! One has to wonder if leaders over there have a “suicide-wish”!

Update: A good related piece from Matt O´Brien:

History doesn’t need to repeat, or even rhyme. Europe doesn’t have to keep crucifying itself on a cross of euros, the gold standard of the 21st-century. The euro’s northern bloc could decide to let the ECB do more. Or it could decide to start spending more. Or not. Eurocrats seem content to do just enough to keep everything from falling apart, and nothing more. It’s one part inflationphobia, and another part strategy. Indeed, it’s how they try to keep the pressure on the southern bloc to push through unpopular labor market reforms. But doing enough today eventually won’t be enough tomorrow if the southern bloc doesn’t have any hope of recovering within the euro. The politics will turn against the common currency long before that.

By that point, Europe won’t need an acronym anymore.

6 thoughts on “Pictures of tragedies

  1. Poland is a remarkable example of the health of a nation that stays outside the ECB, and can control its own money supply. Really, how much is there to understand? This seems so obvious.

    Great blogging as always—when I say it is obvious, it is obvious due to the great charts provided by Nunes.

  2. So, as I understand it, on a system like the euro, Poland should be ok, or if anything, suffering policy that is too lose. The ECB sets a single interest rate, so those countries who have the highest natural rate of interest should do well. (If the interest rate were set at full employment). From Poland’s perspective, there are two major factors in its favour which should give it a higher natural rate of interest than almost any other large economy in Europe. Firstly, its favourable demographics. With a much younger population it probably has a lower natural savings preference than other countries, and it also has much less capital per worker, and also a much lower female participation rate, which leaves lots of room for labour force participation to increase. All of these point to increased demand for capital and a higher natural rate of interest. Probably why they have a 3% interest rate, even with a very healthy debt to GDP of 55%.

    Now, as I understand it, this should be equalised by large capital flows into Poland from the core, compared to any other country. Surely that is a good thing? It should also mean that Poland should always have the highest NGDP of all the major economies in the euro, and given the ECB’s german/deflationary bias, it would probably be the best positioned of all the large euro economies under the ECB’s regime.

    Of course, that doesn’t mean that its a good idea, but I would imagine that it would generate significant capital flows into Poland from the core, as it looks favourable compared to the rest of the periphery. It might be a risk worth taking for Poland to generate large foreign investment.

    The real question is, why would the euro let them join. It seems like its good for Poland but bad for the rest of the euro zone, as it further increases the difference in fundamentals between the best and worst performers. I would imagine that it would induce the ECB to tighten policy still further to `control inflation’.

    Not sure, but my `dubious forecast’ would be for Poland to have the highest NGDP growth of any large european economy.

    PS: Its Easter, slightly drunk now, no guarantees that this makes sense.

    • You should be either praying or eating chocolate, not drinking! Poland is in the position it´s in because it enjoyed monetary freedom. With that freedom it can remain a good ‘prospect’ and attract the required foreign investment. Becoming an euro member would on net be negative since It´s viewed as bad ‘turf’.

  3. I did both of those too. 🙂

    While I agree that Poland has enjoyed appropriate monetary policy, my point is only that, by a happy accident, it would continue to enjoy appropriate monetary policy under the ECB, because its demographic advantages mean that it is more like Germany than Portugal. 🙂

    This is not an endorsement. The ECB seems like a terrible institution, but most choices of monetary policy would be appropriate for at least one Eurozone member.

  4. “What about Germany? Hitler comes to power in January 1933 and almost immediately begins the war build-up. It has the strongest recovery.”

    Currency controls were imposed in July 1931, effectively taking Germany off the gold standard. This was of course before Hitler became Chancellor in January 1933. Real GDP reached an alltime high by 1935. Unemployment fell from 28.1% in 1932 to 4.2% in 1937. Data comes from here:

    More importantly, fiscal stimulus was too small to account for the speed of recovery. Apparently Nazi policies deliberately crowded out private demand to ensure high rates of rearmament:

    So even in Germany it was monetary policy which ended the Great Depression.

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