The Euro Crisis and the Dangers of Disembedding Liberalism: Lessons from the Gold Standard

During the period from 1945 to the early 1970s, countries in financial distress had four broad economic policy options to get out of a crisis: devalue, inflate, deflate, or default. The “embedded liberal” compromise that was struck by John Maynard Keynes and Harry Dexter White at Bretton Woods allowed countries to combine internal with external equilibrium. As Barry Eichengreen convincingly argues in Golden Fetters, the rigidity of the gold standard in many ways contributed to the length and depth of the Great Depression. The European monetary union was built on the neoliberal idea of disembedding markets, and by abiding to strict fiscal rules and forever linking their currencies in an irreversible fixed rate, the two options of inflate and devalue are now off the table. The only option for eurozone countries out of a crisis now is deflation, and hence deep austerity cuts, with disastrous consequences for the legitimacy of the EMU. What lessons can current policymakers in Europe learn from the interwar experience with the Gold Standard that could help them out of the current crisis? And what is the central role of institutions and ideas in determining the outcome during both periods?