The View | Fixed exchange rates, economic crisis and radical populist politics
Asian financial crisis was Hong Kong’s ‘great depression’
Severe financial and economic crises that are not corrected quickly can have severe political consequences. For example, one of the most horrible political consequences of the Great Depression was the rise of fascism in Europe.
Now, eight years into the 2008 global economic crisis, the return of populist political extremism in many corners around the world is demonstrating again that prolonged economic insecurity combined with xenophobia can polarise and fractionalize the political landscape.
The leading appeal of right wing and left wing populists is that mainstream democratic politicians are failing to get us out of this crisis. This was also the case in the 1930s.
Milton Friedman blamed the economic and political consequences of the Great Depression in the US mostly on the tight monetary policy of the Federal Reserve Bank. He also blamed the Gold Standard because it limited the freedom of governments to conduct independent monetary and fiscal policy to stabilise the domestic economy.
Under a fixed exchange rate regime, governments can only resort to devaluing their currencies in a bid to push the pain of domestic adjustment onto other countries. For this reason, Friedman advocated free-floating exchange rates among major open economies to restore the autonomy of macroeconomic policy.
The sense of imposed isolation and helplessness has grown
The euro is also a fixed exchange rate arrangement and it has worsened the ability of many European countries to pursue independent domestic stabilisation programmes in the aftermath of the 2008 global economic crisis. Friedman opposed the euro project from the very start, fearing this very situation.