Much of Europe is now in a deep economic crisis. Some of it is clearly cyclical, reflecting not only the global ripple effects from the U.S. economic crisis but also the bursted housing bubbles in countries like the U.K., Ireland, Spain and the Baltic states and the negative effects this in turn has had on the countries who trade with them and whose financial markets that are integrated with them. It shouldn’t be denied that this is clearly a serious crisis, which may linger on for awhile.
But cyclical downturns eventually end, so in the long run, structural factors are more important. But for many European countries, the problems aren’t just cyclical. Even at the peak of the cyclical boom, many Western European countries found it difficult to grow more than 2% a year. While some would argue that this reflects that they are so rich that they can’t grow much more, many high income countries inside and outside of Europe have in fact had persistent (albeit sometimes interrupted by cyclical slumps) high growth, including for example Hong Kong, Singapore, New Zealand and Ireland.
There are many reasons why these countries have had particular success, but one key factor that strikes out is that all of them have had very strong commitment to the principles of free competition, free trade and globalization. One big danger with the current slump is that politicians will fall for the temptation of restricting competition, globalization and trade in the belief that this will help their economy at the expense of others, so-called beggar thy neighbor policies. This was exactly what happened in the 1930s when U.S. politicians passed the Smoot-Hawley tariff bill, something which provoked retaliatory actions from other countries and thus resulted in a global trade war-a war which will only produce losers. Similarly, country after country engaged in currency devaluations intended to subsidize its tradable goods industries at the expense of other countries.
We are already seeing many distressing signs that politicians are repeating the mistakes of the