Is Greece in 2010 Equal to Austria in 1931?

The economic climate in Europe today has worrying parallels with the 1930s, suggests Mike Farrell with aspenIbiz.

It is worth remembering that upheavals in Europe triggered the economic malaise that made the Great Depression “Great”.

Although 1929 is etched into history as being synonymous with the Great Depression, the real tragedy did not get underway until 1931.

The Austrian bank Boden-Kredit-Anstalt was rendered insolvent in the aftermath of the credit boom of the late 1920s. It was “saved” in October 1929 by merging with the stronger Oesterreichische-Credit-Anstalt. An international syndicate, headed by the Rothschild's of Vienna, that included J.P Morgan and Company, injected new capital into the merged entity.

The Austrian Government guaranteed the bad debts of the old bank and the merged entity spent 1930 “muddling through”. But then in May 1931, the Credit-Anstalt bank collapsed. Some blamed the political climate at the time, with the economic union between Germany and Austria (Zollverein) spooking France. Others simply stated that Austria had “consumed its capital” with the result that a banking collapse was inevitable.

Whatever the reason, the collapse of Credit-Anstalt triggered a run on German banks by French and US creditors, leading to the forced closure of the German banking system. London financiers were heavily exposed to German banks, and industry, and were caught out by the banking sector shutdown, which effectively froze their assets.

This in turn caused panic amongst London's foreign creditors and a run on the currency. The pound sterling was overvalued causing England’s major export industries to be uncompetitive. Unions were heavily represented in these industries and refused a proposal to cut wages. Unemployment was high and structure of the whole economy was inefficient.

England had two choices – austerity or devaluation. England chose devaluation because the politics of austerity were too hard.

In the 1930's, contagion went from the periphery to the core in very quick time. Austria folded in May 1931. By September of that year, Britain had gone off the gold standard and devalued the pound sterling.

And so went the contagion that crippled the world economically and provided the impetus for Hitler's rise and decades of economic and political turmoil.

The situation in the global economy today is eerily similar.

Greece, a peripheral European economy, is close to defaulting on its debts.

Being part of the Eurozone and using the Euro, Greece does not have the option to devalue its currency.

And, any default would lead to contagion, as creditors pull funds from other highly indebted countries. The list of targets is well known; Spain, Portugal, Ireland, Italy & England.

As England found in the early 1930s, Greece may find the politics of the EU austerity plan, necessary to prevent default on its debts, to be too hard.

The only other choice left would be to leave the EU and return to the Drachma, its previous currency, so that it could devalue its debts.

If Greece were to return to the Drachma other countries would likely follow and return to their former currencies … and this would bring down the Euro experiment.

This would also usher in another sharp global slowdown as European banks would be pushed towards insolvency by the associated write-downs on sovereign debt.

I favor a quote from Steve Forbes … Forbes says that pursuing additional financial education and the resulting increase in our financial literacy will open our eyes to alternative wealth creating strategies and this will be they key to resolving our financial crisis.

As an example of alternative wealth creating strategies … consider investments in energy assets that are inherently useful like oil rigs, hydropower, or methanol plants … perhaps precious metals, water rights, oil, natural gas, potash mines, or gold mines … things hard to build, difficult to replace, and costly to substitute … definitely not financial stocks, definitely not retail stocks, definitely not commercial property.

I trust this article provides a little more insight in to the Global Financial Crisis; the economics of the EU, the ECB, and the Euro; and the adverse consequences if you do not have sound money practices and solid public finances.

I will continue to introduce alternative wealth creating strategies to consider in future articles and updates at my blog over the next few weeks.