Will history repeat itself?
When the socialist French President François Mitterand announced his government’s economic program after winning the elections 32 years ago, it was interpreted by the Financial Times as the work of an inexperienced watch repairman who was trying to repair an already perfectly working watch. The comment might seem a little bit rude but, at the same time, quite realistic. As a matter of fact, the program resulted in a deterioration of macro-economic balances within a short period of time and resulted in a rapid capital outflow. To stop that, a series of illogical and irrational measures, such as banning all capital transactions and even limiting the amount of cash that could be carried by travelers, was implemented, resulting in further deterioration. Ultimately, it really took years this time to repair the ruined economy.
Thirty-two years later, another socialist leader, Mr. François Hollande, has become the president of France and, by cutting the retirement age for some workers to 60, gave his first indication that he would not obey all the rules that some other Euro leaders, especially German Chancellor Angela Merkel, imposed for the restoration of the eurozone economy. To be realistic, his position is stronger than it was for Mitterand, who ruined a sound economy; instead, the new leader took over an already ill-treated one with promises to repair it. However, this does not mean that he might not cause further damage instead of a timely repair.
The recent French elections again proved that a majority of the people in France are against the austerity measures imposed by the government. The EU leaders have been promising at every occasion and at every summit meeting that they will focus not only on deficit and debt problems, but also on creating jobs and growth. However, it is understood that they were not able to convince the French people how they will manage to realize these contradicting targets simultaneously.
During the recent crisis when economists and politicians were both unable to put effective instruments into the hands of authorities about how to minimize the damage created, John Maynard Keynes’ ideas again became the only savior. The theoretical explanations of the reasons for the 1929 crisis – the Great Depression – and the remedies to cure the economic and social problems it created were presented in a book published by Keynes seven years later in 1936. Because of the lack of new ideas, some politicians turned to Keynes again and loose monetary and fiscal policies again became the main part of the measures against recession.
Now it must be remembered what Keynes advised not only after the 1929 crisis, but also after World War I to stop a worldwide recession. Technically, it was a very simple and practical suggestion: If people are hesitant about spending for some reasons, governments must spend in order to stimulate total demand. After World War II, this advice became so popular that it brought great fame to Keynes that he would never have been able to have imagined before his death in 1944. Moreover, during the recent crisis, almost all Western governments have implemented similar policies to stop the recession.
The problem is now whether his advice will be effective this time in stimulating growth in the eurozone without creating more serious debt and deficit problems. After the 1929 crisis, the realization of the positive effects of mass government spending in the United States took a long time. And it is still a subject of discussion about whether it was those measures or World War II that restored the American economy. However, even if the second thesis is correct, this does not contradict Keynes’ ideas; the massive public expenditures during the war created jobs and stimulated growth.
Then it might be suggested that history might repeat itself in two ways: First, growth ahead of austerity policies could restore the eurozone economy or enlarge the difficulties by creating further deficit and debt problems. The first alternative makes Mr. Hollande a big leader, but the second one will be disastrous for himself, the French and the entire European economy.