Europe’s Creditanstalt Moment—Is It Really 1931 Again?: News Analysis

In further remarks, Liqun made it clear the risks of such an investment could not be justified within the policy guidelines of his fund. The entreaties have not ended though. International Monetary Fund Managing Director Christine Lagarde is currently in Beijing with her financial pitch book, urging Europeans to fill the political void left by the resignations of the Greek and Italian prime ministers in the hopes of instilling greater confidence in Chinese investors.

But the Chinese, besides having plenty of economic problems of their own to deal with, must be looking at the situation and saying: “We’re not the only ones with deep pockets.” What about Germany and other northern European economies that are stable and prosperous? If they’re not willing to take care of this problem, why should we?”

And they would have a point. In the heart of the U.S. economic crisis, the U.S. government bailouts of AIG, Washington Mutual, GM and Chrysler were highly unpopular. But they were politically possible because Americans understand these corporations to be American entities. Germans don’t really feel responsible for Spanish or Italian banks. Americans bristled at paying for what was seen as someone else’s irresponsible risks. But Germans are outraged at paying for another country’s profligate welfare state.

For all these reasons, the market has been far too quick to react positively to news of rescue plans. The political will does not exist to fix this problem and Europe lacks the institutional authority to fix it in the face of political opposition–in contrast to America’s strong executive authority.

So the European contagion is likely to progress to the point of bankruptcy, and DeLong’s Creditanstalt analogy may be apt. It is sobering to consider that the economic weakness that gave rise to the Great Depression in turn led to fascism, totalitarianism and world war. When the Germans reoccupied the Rhineland, Germany’s European neighbors had no appetite to fund a military response at a time when Hitler’s army would have fled for the hills.

Military threats abound today as well and historians might one day wonder why it is that at exactly the time the European model was crumbling, the U.S. chose to weaken itself with similar policies such as President Barack Obama’s health-care overhaul or President George W. Bush’s prescription drug plan.

Europe’s decades-long experiment in living beyond its means has brought us to this dangerous place. America’s shorter career in profligacy gives it time to take precautionary measures before it too lacks the means and will to keep its society solvent and strong.