Financial Times
September 20, 2011
Even as Europe debates the future of Greece, it is hard for many eurocrats to imagine Greece might pull out. Look back 80 years this week and Britons with a similar belief about the gold standard got a shock when the UK became the first large country to pull out of the post-world war one currency arrangement.
The gold standard seemed at the time to be an “immutable” exchange rate regime, says Catherine Schenk, professor of international economic history at the University of Glasgow, and a member of the Chatham House group examining gold’s role in the monetary system.
Even as late as 1934, after the US had belatedly abandoned the standard – marking the beginning of the end of America’s Great Depression – author Hartley Withers could not see “any possibility” that the remaining French-led gold bloc would move to a paper currency. It did, soon after.
A glance at Greece should be enough to convince any politician not to even think of a reintroduction of the gold standard. Fixed exchange rates force economic adjustment via wages and prices; Greece needs dramatic wage deflation to regain competitiveness against Germany. The political impossibility of slashing pay packets enough is a reason it may have to leave the euro, even though living standards will fall either way.
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