Euro depression is 'deliberate' EU choice, says former Bank of England chief

Europe's deep economic malaise is the result of "deliberate" policy choices made by EU elites, according to the former governor of the Bank of England.

Lord Mervyn King continued his scathing assault on Europe's economic and monetary union, having predicted the beleaguered currency zone will need to be dismantled to free its weakest members from unremitting austerity and record levels of unemployment.

Speaking at the launch of his new book, Lord King said he could never have envisaged an economic collapse of the depths of the 1930s returning to Europe's shores in the modern age.

But the fate of Greece since 2009 - which has suffered a contraction eclipsing the US depression in the inter-war years - was an "appalling" example of economic policy failure, he told an audience at the London School of Economics. 

The depths of Greece's depression Credit: RBS economics/RBS

"In the euro area, the countries in the periphery have nothing at all to offset austerity. They are simply being asked to cut total spending without any form of demand to compensate. I think that is a serious problem.

"I never imagined that we would ever again in an industrialised country have a depression deeper than the United States experienced in the 1930s and that's what's happened in Greece. 

"It is appalling and it has happened almost as a deliberate act of policy which makes it even worse". 

Lord King - who spent a decade fighting the worst financial crisis in history at the Bank of England - has said the weakest eurozone members face little choice but to return to their national currencies as "the only way to plot a route back to economic growth and full employment". 

Lord King, former Bank of England chief, 2003-2013

"The long-term benefits outweigh the short-term costs," he writes in The End of Alchemy. 

The former Bank governor has said popular disillusion with EU economic policies are likely to lead to disintegration of the single currency rather than a move towards "completing" monetary union. 

Two of the eurozone's debtor nations - Ireland and Spain - are currently locked in electoral stalemate after their pro-bail-out governments failed to win the backing of voters. 

But the European Commission has defended itself against claims that punishing austerity measures have made incumbent European regimes unelectable, arguing that Brussels' economic policy represents a "virtuous triangle" of austerity, structural reforms and investment.

Outside of the eurozone, Lord King warned against undue pessimism about the longer-term prospects for the world economy, dismissing the "secular stagnation" thesis made popular in recent years by the likes of US treasury secretary Larry Summers. 

He said it was a "serious mistake" to believe that productivity - which has flatlined across the developed world since the crisis - would never revive as technological development has been exhausted. 

Instead, current waves of new research and innovation meant the 21st century was the "golden age of scientific discovery". 

"I see absolutely no reason to suppose that because we had a banking crisis and a recession that [ideas, innovation and entrepreneurship] have permanently disappeared. They haven't and are waiting to spring back.

"The thinking that all these ideas will not come through to have practical ways of improving our living standards, seem extraordinarily pessimistic and something for which there is no basis in fact at all over the last 250 years of economic growth."

Lord King's book lays out a critique of the endemic imbalances which have plagued the global economy in recent decades. Failure to tackle the disparities between high savings and high spending rates in different parts of the world could see policymakers sleepwalk into another crisis, he has warned. 

Meanwhile, central bank policies to boost levels of demand and encourage spending were necessary but not sufficient answers to the world's growth malaise,  only "buying time" for policymakers.

"We have to use that time to shift economies from their present disequilibrium to a new equilibrium where there is a proper balance between spending and saving, exports and consumption," he said. 

"Only then can we achieve rapid growth, and stable inflation. That is the prize. I think we can do it."

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