I WRITE from America, where those who care about Europe ask one question only. What is going on? What is this ‘euro crisis’ that never seems to end? What has happened to Greece, Portugal, Italy, Spain, Holland and now France? Have we all gone insane?

The economist Paul Krugman has one answer. He suggests that Europe is now replicating the 1930s “in ever more faithful detail”. Governments, he says, are “committing economic suicide”. When every economic tenet cries for treasuries to restore growth, spend, stimulate, inflate and rebuild confidence, they are advocating ever more austerity and balanced budgets, forcing their economies towards recession.

They are doing so not because they believe austerity will generate growth. They are doing it because they are imprisoned in a defunct dogma, the propping up of the euro.

Nothing is more eerie than to read accounts of Europe’s economy between the world wars, notably the idealistic ‘Locarno spirit’ year of 1925. It was then that finance minister Winston Churchill returned Britain to the gold standard. Wages would be forced down to compete with America, and Europe’s prewar economic stability would recover. Keynes pleaded that this was madness. The British pound was 10 per cent overvalued against the dollar and the outcome would be “crippled exports, unemployment and strikes”.

Churchill was wrong and Keynes was right. Six years later, a minority Labour government hit financial collapse and failed. In the summer of 1931, with capital fleeing the country and bankers wailing for austerity, a coalition national government was formed and abruptly came off the gold standard. The pound slid from $4.85 to $3.40. Despite forecasts of catastrophe, Charles Mowat’s classic history of the period records that “hardly a leaf stirred”. There was no revolution in the streets, and devaluation aroused no more interest “than that of a passing sneeze”. Within four years British industrial production had risen 25 per cent, while unemployment fell from three million to two million.

History rarely repeats itself, but its lessons do. The Bank of England and Treasury are trapped in similar orthodoxy to that of their prewar forebears. They hold that inflation is the greatest curse that can afflict the British economy, even as they mastermind the greatest collapse in demand that Britain has suffered since the war. — The Guardian, London