That's a 'Depression': Europe's Double-Dip Is Officially Longer Than Its Great Recession

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(Reuters)

The past is a foreign country we like to think wasn't as smart as our own.

But if reality television wasn't proof enough, the financial crisis should put the lie to this intellectual narcissism. While the U.S. has muddled through its Great Recession, the euro zone is still mired in its new Great Depression -- and this despite 80 years of hard-won knowledge that should have made such a slump a barbarous relic.

The latest GDP numbers for the euro zone were brutal as usual. The 17-nation economy contracted for the sixth consecutive quarter in the beginning of 2013 -- longer even than in 2008-09 -- as it fell 0.2 percent from the fourth quarter of 2012. The entire bloc is either in a long recession, a new recession, or almost so. Indeed, Greece, Portugal, Spain and Italy continued their neverending slumps; Cyprus, the Netherlands, Finland and France fell into new slumps (and Slovenia likely would have too if it had reported numbers); while Austria, Belgium, and Germany only just avoided new slumps by growing 0.1 percent in the first quarter. Add it all up, and euro zone GDP is still 3.4 percent below where it was in 2007 -- compared to U.S. GDP growing 3.2 percent over that period, as you can see below in the chart from the Wall Street Journal.

Guess what: More austerity and less monetary stimulus were pretty horrible ideas.

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But Europeans seem to prefer to keep recreating the 1930s rather than learning anything from them. Just look at the latest Pew Research polls. For one, every country still wants to keep the euro. As you can see below, the common currency enjoys no less than 63 percent support -- and it actually increased in Spain and Italy the past year.

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Now, the euro understandably holds a special place in the European imagination as a monetary monument to solidarity, but it less understandably holds this special a place after forcing half the continent into deep depression. It's the gold standard minus the shiny metal -- and it's not working much better than the previous iteration. 

But even less understandable is the continent's continuing infatuation with austerity. Except for Greece, majorities in every euro zone country polled prefer spending cuts to stimulus. Again, this would be understandable if not for everything that has happened the past four years. Yes, the Keynesian case is counterintuitive -- we really should solve a (private) debt problem with more (public) debt -- but the failure of austerity should have made it less so. Apparently not.

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Inflation isn't exactly popular either. There's a caricature that Germany is deathly afraid of anything resembling a price increase, and the rest of Europe isn't, but that's not true. If anything, the rest of Europe is more inflation-phobic. Why? Well, southern European wages haven't kept pace with prices -- which have increased due to increased value-added taxes -- and that's turned into near-unanimous opposition to inflation.

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Europeans don't want devaluation, stimulus or inflation. But they don't want the recession to go on either. These things do not compute. Now, southern Europe does have big structural problems holding back growth, but fixing them won't bring it back now -- and they aren't why northern Europe isn't growing much either. The euro zone just doesn't have enough spending. If nothing else, the Great Depression should have taught us the danger of moralizing a lack of demand.

Future generations will wonder how we could have been so wrong too.

Matthew O'Brien

Matthew O'Brien is a former senior associate editor at The Atlantic.


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