The Netherlands in the Interwar Years and the Greek crisis

 

The lingering situation in Greece has puzzled experts of all kinds with its persistence and severity. Thus, many of them point out that a similar case was that of the Netherlands during the Great Depression. Then just as now the Netherlands was a member of a monetary union of states, the Gold Standard block. Then just as now the Netherlands was confronted with a shattered economy, growing budget deficits and rising unemployment. Then just as now they were certain that the real economy would respond to fiscal and monetary adjustments. Well, what is certain is that the Netherlands had suffered more than any other country during the 1929 crisis and it revived only after it left the Gold Standard system.

After the First World War, many countries, including the powerful ones troubled with their own torn economies, accumulated debts and chaotic hyperinflation, sought stability. Therefore, many countries were more than willing to return to the pre-war Gold Standard, for economic security.  Additionally, for the states that suffered from lack on credibility status, adherence to the Golden Standards rules meant “good fiscal housekeeping” and easier access to foreign capital.

However, many economic historians blame the Gold Standard for the prolonging interwar economic depression.  In a nutshell, in the pre-war period the Bank of England, which was the centre of the system, made sure it had enough gold to ensure convertibility. After the War the inexperience of the US and inefficient cooperation among central banks led to accumulation of gold from big players like France and the US. This asymmetry between the surplus states and deficit countries widened further since no rules prevented surplus states from accumulating reserves. Consequently, surplus states did not inflate their economies by expanding domestic money and the system failed to boost the competitiveness of the deficit states leaving countries in the periphery trapped into a cyclone of debt aggravation and deficits.   

The case of the Netherlands

The Netherlands experienced the Great Depression harsher and for a longer period than the rest of the countries. It entered into depression in 1929 and felt a boost the year after the country abandoned the Gold Standard, in 1936. Actually, this is what puzzles the historians, the decision not to leave the currency union earlier to enter into recovery significantly sooner too.

For the Dutch predicament, many blame the structural characteristics of the Dutch economy and others blame the political decisions.  Well it was a little bit of both. Regarding its economy the Netherlands had long been overwhelmingly dependent on international trade with 30 percent of GNP coming from exports. The 1929’s heat hard world trade and the Dutch economy almost immediately faced currency, and bank crisis and debt accumulation. The situation was steadily deteriorating since authorities bound by Gold Standard rules could not devalue to enhance exports or pursue expansionary policies to assist economy.

Similar conditions in other countries made them leave the Gold Standard, among them the UK and the US. The Dutch decision not to do so was felt by many experts as perverse since the government in order to cope with monetary variables adopted more deflationary policies by lowering wages even further and throwing economy into abyssal depression. The trap was that the Netherlands leaned upon international cooperation to solve the crisis hoping for expansion of trade with powerful states. But the strong ones had their agenda. The international trust was in tatters and economic protectionism and trade restrictions were their choice.

By 1935 the Dutch economy had shrunk more than 21 percent of GDP since 1929 and the society fretted under mass unemployment of almost 33 percent. Civil and private workers accepted sharp wage cuts whereas it was almost impossible for someone to find work. As in most countries in similar situation the Netherlands experienced social unrest. However, strikes or other organized demonstrations were lower than in other states. What is worth mentioning is that the fascist party, Dutch National Socialist party (NSC) gained limited support in the Dutch parliament for the whole period of the depression.

The question is why the political system insisted on adhering to the Gold Standard rules. Several researchers have pointed out that besides being inexperienced with economic crisis management a factor that mattered significantly was the government’s partisanship. Whereas the left parties placed emphasis on income distribution the right wing was more concerned with inflation consequences, dreading a new wave of hyperinflation. Indeed, the right wing coalitions monopolized the interwar politics and even though they were frail and full of conflicts they succeeded in excluding the socialists, the second largest party, altogether. This occurred mostly due to the bishops’ commands that influenced the Roman Catholic Party to declare that it would absolutely not govern with the socialists unless it was an extreme necessity. One thing is for sure that the Keynesian ideology had thrown these short-sighted politicians into the dust bin.

The Greek case

Surely, it can not go unnoticed that there are similarities between the Greek and the Dutch case. Now just as then the asymmetries between surplus states and deficit states in the EU deteriorate the chronic deficits of the periphery. Now just as then world crisis has highlighted the structural pathologies of the Greek economy. Now just as then Greece can not gain competitiveness by devaluing. Now just as then the government is trying to “correct” the economy through austerity measures. Now just as then the politicians are unprepared to deal with the demanding events.

The last time the Greek economy was smaller than in 2012 it was 2001. The economic downturn combined with fiscal mismanagement has led to a decline since 2007 of about 21 percent of GDP. Soaring unemployment has almost reached 30 percent while half of young Greeks are out of job. Even though, the Greek Ministry of Finance has announced budget surplus in the upcoming months, Spain has proved that running a budget surplus is no insurance against economic meltdown. 

The question is whether Greece needs to exit the eurozone to achieve recovery like the Netherlands did from the Gold Standard rule. The real question is whether Greece has a way within eurozone to create over a million new jobs, to return to pre-crisis unemployment rates. The Asian Tigers after the 1997 bubble achieved recovery partly because they had trade surpluses with the US and therefore enough dollars to pay their dollar denominated debts. Greece's problem on the other hand is its chronic trade deficit with Germany and the EU which siphons off its euros. The relief would come from a trade contribution that would make up for fiscal consolidation. But Greece still runs a trade deficit with its main trading partners, in the EU. Without currency devaluation experts assess that for Greece to be back in balance, carrying the burden of austerity, Germany should inflate by 5.5% annually for the next ten years. Well, this does not seem a possible choice for the German politicians.

Worth mentioning is also the fact that austerity is far from “correcting” the structural flows of the Greek economy. The actual reforms (not horizontal wage cuts) are near to zero, while the viciously beep corruption is dominant in the “gift economy culture”. An adjustment via currency devaluation affects the majority of people in a country whereas internal devaluation “hits” those that are targeted by the government. No wonder why the Greek middle class is appalled by the injustice of the recovery programme. This is no sustainable path to recovery and social peace. 

If nothing changes overtime, exiting the euro system will have clear advantages for Greece. However, the outcome depends a lot on the progress of the European economic and political unification and the progress of the world economy. If an effective distribution of income is adopted within the eurozone and if the democratic deficit is effectively tackled then the eurozone has a chance of surviving. Indeed, this is a herculean task, one that might as well end up being a utopia.    

Most probably, Greece will not exit the eurozone, any time soon, at least not until it is certain that the current eurozone system is in the way of collapsing. In previous currency unions, small economies left these systems after the leading countries had abandoned the blocks. In fact, the Netherlands left the Golden Standard last, after France and the US had left it. Of course, this had lingering, detrimental effects on their economies. It is questionable whether Greece will escape this pattern. At least back then there was the alternative of the Keynesian policy; nowadays there is no alternative philosophy to accelerate a progress towards a quick exit from the crisis.    

by Elpiniki Karakosta