By the end of WWI Europe was very bad economically and it was also politically divided, having the possibility of social revolution. The unfair treaties signed after the war and the incompetence of the League of Nations contributed greatly to WWII.
Europeans had little experience with democracy. Also, when difficulties arise in countries the political parties are weakened by divisions within the group. People may then be willing to sacrifice democracy in exchange for strong leadership. This happened in Italy and Germany in the 1920s and 1930s.
The new government set up in Germany in 1919 was the Weimar Republic. This government had a big problem, it did not have the full support of the Germans, for millions of them viewed the Weimar government as traitors because they signed the treaty of Versailles.
Germany during the war simply printed more money to pay for the war-- therefore the money began to collapse after Germany's defeat in 1918, and had what is called super inflation. Most Germans simply blamed the Weimar Government for Germany's problems even though the war really caused them.
During the early 1920's Europe experienced an economic depression and many countries were converted into Communism as a result.
Some of the main reasons for the depression were: overproduction and under consumption, ie. business produced too much and consumers bought too little. Store owners could not sell all they had, they stopped ordering, factories began to stop being able to produce. Farming became more like industry and therefore farmers became more dependent on the market prices. Farmers also faced competition from other countries. Finally there was simply too much agricultural goods on the market, which made their price lower drastically. Many farmers could not sell crops for profit and could not pay off loans. These bad debts weakened banks.
In the late 1920's Europe achieved a measure of economic recovery.