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No Nouriel, I am no longer optimistic – it feels like 1932

Niall Ferguson and Nouriel Roubini have a comment in the Financial Times. I have great respect for both gentlemen – even though I often disagree with both of them – and their latest comment raises some very key issues concerning the future of the euro zone and Europe in general. And it is very timely given that this weekend the Spanish government has asked the EU for a massive new bail out.

I will not address all of the topic’s in Ferguson’s and Roubini’s article, but let me just bring this telling quote:

We fear that the German government’s policy of doing “too little too late” risks a repeat of precisely the crisis of the mid-20th century that European integration was designed to avoid.

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 1923 (the year of hyperinflation) than to 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.

Hear! Hear! I have often been alarmed how European policy makers are bringing up the risk of higher inflation (1923) rather than the risk of deflation (1392-33) and I have earlier said that 2011 was shaping out to be like 1931. Unfortunately it more and more seems like 2012 is turning out to be like 1932 for Europe.

In the 1930s the crisis let to an attempt of a violent “unification” of Europe. This time around European policy makers are calling for more political integration to solve a monetary crisis despite the fact that European institutions like the ECB and the European Commission so far has failed utterly in solving the crisis. We all know that what is needed is not closer political integration in the EU, but monetary easing from the ECB. The ECB could end this crisis tomorrow, but the problem is that we apparently will only get monetary easing once further political integration is forced through. This is unfortunately what you get whenpolitical outcomes become part of the monetary policy reaction.

Last time I spoke face-to-face with Nouriel Roubini was in 2010 (I think just after Bernanke had announced QE2). Nouriel asked me“Lars, are you still so optimistic?” . I actually don’t remember my reply, but today my answer would certainly have been “NO! It all feels very much like 1932″