By Barry Eichengreen
''Following the 1929 stock market crash, Europe was hit by a massive deflationary shock. Output collapsed and unemployment soared. Unable to agree on coordinated reflationary action, governments opted to move unilaterally. One after another, they abandoned the gold standard, depreciating their currencies. By loosening credit in this way, they recovered, one after another, from the Great Depression.
Europe has been hit again by a massive deflationary shock. This time, the constraint on reflationary action is the euro. Governments lack a national currency to depreciate, and lack the power to relax credit, having delegated monetary policy to the European Central Bank. As unemployment again rises to catastrophic heights, they will have no alternative, it is said, but to abandon the euro unilaterally.''
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