January 18, 2010
Europe Risks Prolonged Recession
Paul De Grauwe, Financial Times
The Great Depression taught us several lessons. The first one is that central banks must be ready to provide ample liquidity to save the banking system. Present-day central banks did exactly that. They did not repeat the mistakes of the 1930s when their predecessors tightened money in the face of a banking crisis. The second lesson is that governments should not try to balance the budget when economic activity collapses. Governments today did not repeat the mistakes made by many governments in the 1930s that desperately tried to balance their books when the economy crashed.
There is one area of policymaking where authorities may not have learned the lessons of history and are in the process of repeating the same mistakes. During much of the 1930s a number of continental European...
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