By the time the euro arrived, democracy plus fifty years of the welfare state as a shock absorber had become even more of a constraint on such policies. Yet the euro demands deflation and austerity today, as it remains the Eurozone’s primary mechanism of adjustment. There may be no convertibility into gold under the euro, but the credibility of the claim to be able to pay back government debt performs the same function, providing an external constraint to policy as gold did eighty years ago.

Indeed, the euro arguably provides even more of a constraint than the gold standard in one respect. Whereas states on gold can always “get off gold”—there is no need to print a new currency when doing so—the “once and for all bargain” that was the euro made states dump their old currency for good. There is nothing to go back to, which adds an extra layer of bondage to what is effectively a gold standard without gold.

There are then two key lessons for the Eurozone from the gold standard era. Repeated attempts to get back on gold and stay on it in round after round of austerity in the 1920s made the already unbearable simply impossible, and the system fell apart in the early 1930s. States that stayed on gold and kept trying to cut their way to growth after 1930 fared far worse than those that abandoned it and reflated internally. The first lesson of austerity from the 1920s and 1930s follows: austerity simply doesn’t work, no matter how many times you do it.

Recognizing this leads us to the gold standard’s second lesson for the Eurozone: you can’t run a gold standard in a democracy. Eventually, it will fall apart because there are only so many rounds of austerity people will vote for before the system breaks down.

These are the two key lessons that the Eurozone forgot in the crisis. It’s also what it needs to re-learn if it hopes to survive.

Blyth (2013), Austerity: The History of a Dangerous Idea, 6. poglavje.