Europe is now replicating the 1930s and the mistakes it made with austerity back then as well outside of Germany. Of course, Merkel has imposed the German view of austerity based on their experience but has ignored the opposite experience of the rest of Europe that led to the 1931 Sovereign Debt Crisis and mass defaults.
It was the year of 1925 when then chancellor of the Exchequer, Winston Churchill, returned Britain to the gold standard. Britain was trying desperately to reestablish itself as the financial capital of the world as if nothing had taken place. Returning to the gold standard resulted in wages being forced down to compete with America.John Maynard Keynes at the time pleaded that this was madness. The pound was overvalued against the dollar by 10% trying to reestablish confidence in Britain but the net result crippled exports and unemployment began to rise and workers engaged in strikes for having wages reduced even though the pound was worth more officially.
Churchill acted in an effort to restore Britain but he was dead wrong. Keynes proved to be correct and this lesson has still been ignored by Europe today. The overvalued pound led to deflation and ultimately forced the economic collapse in 1931. The capital was fleeing Britain and bankers were pleading for austerity to retain bond values. The Labour government collapsed and a coalition national government was formed. They ignored the pleas of the bankers and abandoned the gold standard overnight. The pound fell from $4.85 to $3.40 against the dollar.
NEVERTHELESS, despite the dire forecasts of ultimate catastrophic consequences if Britain abandoned the gold standard, the economy held and began to recover. There was no revolution in the streets as predicted.
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