While there’s currently another thread with a charming discussion of the possible restoration of European monarchies, I’m picturing a scenario that seems much more realistic. Eight decades ago, when much of the world’s financial system was breaking down, different countries responded differently. Some democracies elected good leaders who plotted an intelligent course out of the financial difficulties. Others went the wrong direction and selected totalitarian leaders. This lead eventually to World War II. The Nazis were defeated, but at cost of letting the communists take over half of Europe. Europe’s last totalitarian regime, in Yugoslavia, was not destroyed until the late 90’s, and residual effects from that unfortunate set of events still exist in some places today.
I often hear that today’s economic crisis is “the worst since the Great Depression”. In the United States, whether measuring by unemployment or the stock market or anything else, things haven’t been nearly as bad as they were during the depression. In some European countries, on the other hand, the numbers are getting close to depression levels. Greece and Spain have unemployment rates higher than 20%. The Greek stock market has lost over 80% of its value in less than five years.
History tells us that political extremism thrives on economic crisis. In this month’s elections in Greece, parties of both the communist and fascist variety did better than expected. Likewise in the first round of French elections. There are signs of similar changes in other European countries, but so far no such party has actually taken power at the national level.
I’ll freely admit that a true understanding of the events that are destroying Europe’s financial system is beyond by capability. I recently read this article in the Financial Times detailing potential consequences of what’s happening:
So what might a collapse entail? A cessation of external official funding could trigger a disorderly collapse. The government would default. The European Central Bank would argue that Greek banks no longer possess good collateral, which would prevent it from operating as a lender of last resort. There would be comprehensive bank runs. Athens would impose exchange controls, introduce a new currency, redenominate domestic contracts and default on external contracts denominated in euros.
This would be chaos. Unpaid police officers and soldiers are unlikely to keep order. Looting and rioting could occur. A coup or civil war would be conceivable. Any new currency would depreciate and inflation would soar. …
A Greek exit, particularly a disorderly one, is likely to trigger bank runs in Portugal, Ireland, Italy and Spain, and even further afield. It could also cause collapses in the prices of financial and other assets. A flight to safety, to Germany or beyond the eurozone, could accelerate.
The doom loop in which several other nations are caught could worsen substantially. Spain’s official unemployment rate was 24 per cent in March, and its youth unemployment more than 50 per cent. The IMF forecasts its general government fiscal deficit at just over 6 per cent of GDP this year. With real GDP contracting, its fiscal position is worsening rapidly: gross debt is forecast to increase from 36 per cent of GDP in 2007 to 79 per cent and rising this year. Yields on government bonds are more than 6 per cent. A further large rise in these rates would be unmanageable. …
Suppose that such efforts were not undertaken and the eurozone disintegrated. Mr Cliffe has sought to evaluate such an event. He concludes that the impact on GDP would be huge, not least on Germany. Thus, “in 2012 a deep recession across the eurozone emerges, dragging down the global economy. In the eurozone, output falls range from 7 per cent in Germany to 13 per cent in Greece. Individual country experiences would vary depending upon their exposure to foreign trade and financial interlinkages.”
Inflation would soar in the periphery; in core nations, deflation would set in. Inflation should erode peripheral nations’ debt mountains, provided they were promptly redenominated in the new domestic currencies. The value of the foreign assets of core countries would fall, their new currencies would soar relative to erstwhile partners and their economies shrink. It would be painful for all.
This analysis may even be too optimistic in its estimate of the impact of a full break-up. The mechanisms at work would be powerful: runs; the imposition of (illegal) exchange controls; legal uncertainties; asset price collapses; unpredictable shifts in balance sheets; freezing of the financial system; disruption of central banking; collapse in spending and trade; and enormous shifts in the exchange rates of new currencies. Further government bailouts of financial systems would surely be needed, at great cost. Big recessions would also worsen already damaged fiscal positions.
Such a break-up would also trigger legions of lawsuits. Beyond this, the EU would be cast into legal and political limbo, with its most important treaties and its proudest achievement in tatters. It is impossible to guess at the result of such a profound change in the European order.
This sounds to me like an environment in which a totalitarian government could easily whip up public sentiment and reach power. I’m not saying that such an outcome is certain or even likely. The article I linked to says that this economic crisis may be avoided, and even if it happens it doesn’t guarantee a totalitarian government coming to power. However, to me it looks as if the possibility exists and it’s a large enough threat that we’d be foolish to ignore it entirely.