OK, it’s not really him, it’s the whole European situation. But I’m still obsessing over the third chapter of the new IMF World Economic Outlook, with its discussion of the case of Britain’s return to the gold standard — the case that inspired Keynes to write his scathing “The Economic Consequences of Mr. Churchill”.

Modern estimates (pdf) suggest that Britain returned to the gold standard with a currency overvalued by around 20 percent; it also did so with a large debt from World War I. It proceeded to pursue a policy of harsh fiscal austerity — primary surpluses around 7 percent of GDP — and internal devaluation through deflation. As the IMF shows, it not only suffered prolonged stagnation, it failed even to make a dent in the debt overhang:

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So, how do European debtors — and Spain in particular — compare? Too well for comfort.

Estimating overvaluation is trickier than it should be; among other things, the unit labor cost numbers you see are problematic, because they’re “whole economy” rather than private sector. This means that sharp cuts in public sector wages are counted as a rise in competitiveness, when they really aren’t.

So at this point I prefer just plain labor costs in the private sector, which look like this:

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This suggests something like a 15 percent overvaluation overall — same ballpark as Britain in the 1920s, but maybe a bit smaller.

This is not good. History suggests that unless Spain gets serious help from a broader euro boom, and in particular some inflation in creditor countries, it faces a near-impossible task.