One More Reason To End This Depression Now – Fascism

SONY DSCConcern has frequently been expressed that the deep and ongoing economic crisis in Europe, especially in the so-called periphery, could lead to a rise of political extremism. Reference is often made to the inter-war experience of Germany where the mass unemployment created by the Great Depression and the inability of democratic parties to deal with it, along with other factors, led to the rise of the Nazi party with all the terrible consequences that ensued.

A recent paper by three economic historians (Bromhead, Eichengreen, O’Rourke, available here, hat-tip to David Lizoain) examines whether the German experience of the 1920s and 1930s can be generalised to other countries during the inter-war period. The short answer is yes (at least for right-wing parties, less so for anti-system parties on the left). In the current context the most worrying finding is their conclusion that:

Above all, it <the effect of the Depression on right wing antisystem parties – AW> was greatest where depressed economic conditions were allowed to persist.

Here’s an attempt to visualise where we  stand on that in the current crisis:

real domestic demand

It shows the change in real domestic demand from one quarter to the next from the start of 2008 to the first quarter of 2013: that’s 21 quarters, five years and one quarter. Domestic demand is a better indicator of people’s perceptions of their living standards and prospects, which is the issue here, than GDP.*

Let’s start, as a benchmark, with the euro area as a whole. After the five-quarter plunge during 2009 and 2010 and the brief and aborted recovery, domestic demand has fallen in real terms every quarter for two years. The average quarterly fall was a half a percentage point, and the total (non-compounded) loss 3.8pp. Now look at Spain. Spaniards have seen just two quarters of positive domestic demand growth in the whole 21 quarter period. It has been a virtually uninterrupted nightmare for more than four years. Average quarterly fall 0.9%, for a total loss of 18.2%

Italy did at least manage to recoup some of the losses incurred in the first wave of the crisis, but that has been followed by nine successive quarters of falling demand: over this period the contraction has averaged 1% a quarter for a total of 9.2%. Cyprus has been somewhat more mixed, but has endured a contraction over the same nine quarters as Italy (with one brief and small respite, and no figure yet for Q1/13): and the pace of contraction is almost twice as high as in Italy: 1.9%. The same average applies for the same nine quarters in Portugal.

Eurostat stopped publishing this series for Greece in the second quarter of 2011. Given the GDP numbers, though, there can be no doubt that the fall in living standards has continued in that blighted country, whether or not the statistical authority prints the numbers. Up to that point the ten-quarter decline (with one respite) was running at a 1.7% qoq rate. If we extrapolate that figure to the first quarter of 2013 we are looking at 18 successive quarters – four and a half years. If the rate of contraction has stayed the same, the domestic demand contraction approaches a third.

Bad enough. But it’s worse.

First there is population growth. In Greece and Portugal there was little change. But between 2008 and 2012 the population of the euro area increased by about 1.3%, in Spain and Italy by about 2% and in Cyprus by an impressive 9%: all those oligarchs I suppose. So in per capita terms – thus approximating to “living standards” – the decline is somewhat (and in Cyprus very substantially) worse. More importantly in this context, there is little hope of a turnaround soon. Even the eternally over-optimistic EU Commission foresees in its Spring forecast a contraction of domestic demand in all five countries and at the level of the euro area as a whole (-1.5%in terms of annual averages) . And even in 2014 growth in domestic demand is only foreseen for one of the four countries, Italy, and for the currency block as a whole.

The nightmare of falling living standards, in short, has already gone on many years, in the crisis countries at an appalling rate, and in most of them is set to continue as far as the eye can see.

Let us return to the historical study. The authors found that:

The results suggest that it was growth over a prolonged period (three years or more), rather than growth over the preceding year alone, that really made a difference for the fascist vote. This makes intuitive sense. Societies can generally weather even large one off shocks. But when economic bad news continues beyond a certain period of time and negative expectations become firmly entrenched, some people reach for extreme solutions.

Three years. We have managed that, easily. Of course the crisis countries, much less the European Union, cannot be directly compared with inter-war Germany and other capitalist economies of that period. The initial levels of wealth are much higher. Welfare states provide a degree of protection, although they too are undr attack. Democratic structures are better grounded. Nonetheless it is far from trivial that four of the five countries had military dictatorships in one form or the other within the living memory of a substantial proportion of the population.

Economic history has been excised from the curriculum at most universities, ignoring one of the most important historical lessons. That those unwilling to learn from history are condemned to repeat it.

* In the current context, the distinction reflects the substantial increase in net exports in countries with large current account deficits. For this reason I partially – not on the overall assessment of austerity – disagree with John Weeks, who in two recent pieces for Social Europe (here and here) referred to the distinction between GDP and national income. I would argue that GDP is relevant as one measure of adjustment performance (because the rise in net exports was a necessary part of adjustment), but that domestic demand/income is the right approximation to the experience of the population, which is my focus here.