Niall Ferguson and Nouriel Roubini write: Is it one minute to midnight in Europe?

The failure of German public opinion to grasp the dire state of affairs in Europe today is inviting a repeat of precisely the crisis of the mid 20th century that European integration was designed to avoid.

With every increase in the probability of a disorderly Greek exit from the monetary union, the pressure on the Spanish banks increases and with it the danger of a Mediterranean-wide bank run so big that it would overwhelm the European Central Bank. Already there has been a substantial re-nationalization of the European financial system. This centrifugal process could easily continue to the point of complete disintegration.

We find it extraordinary that it should be Germany, of all countries, that is failing to learn from history. Fixated on the non-threat of inflation, today’s Germans appear to attach more importance to the year 1923 (the year of hyperinflation) than to the year 1933 (the year democracy died). They would do well to remember how a European banking crisis two years before 1933 contributed directly to the breakdown of democracy not just in their own country but right across the European continent.

Astonishingly few Europeans (including bankers) seem to remember what happened in May 1931 when Creditanstalt, the biggest Austrian bank, had to be bailed out by a government that was itself on the brink of insolvency. The ensuing European bank crisis, which saw the failure of two of Germany’s biggest banks, ushered in the second half of the Great Depression. If the first half had been dominated by the American stock market crash, the second was all about European banks going bust.

What happened next? The banking crisis was followed by President Hoover’s one-year moratorium on payment of World War I war debts and reparations. Nearly all sovereign borrowers subsequently defaulted on all or part of their external debts, beginning with Germany. Unemployment in Europe reached an agonizing peak in 1932: In July of that year, 49 per cent of German trade union members were out of work.

The political consequences are well known. But the Nazis were only the worst of a large number of extremist movements to benefit politically from the crisis. “Anti-system” parties in Germany — including Communists as well as fascists — had won 13 percent of votes in 1928. By November 1932, they won nearly 60 percent. The far right also fared well in Austria, Belgium, Czechoslovakia, Hungary and Romania. Communists gained in Bulgaria, France and Greece.

The result was the death of democracy in much of Europe. While 24 European regimes had been democratic in 1920, the number was down to 11 in 1939. Even bankers know what happened that year. [Continue reading…]