Monday, 25 June 2012

I’ve changed my mind about the Euro

imageShould the southern Europeans and Ireland withdraw from the European Monetary Union and go back to their drachmas and punts? Should Germany and the northern Europeans quit paying the southerners’ bills and coalesce around either a new mark or a revival of the thaler, the currency of the late Holy Roman Empire and old Hanseatic League?

Until the weekend, I thought reviving the mark or the thaler was the best approach. But I read an article over the weekend that changed my mind.  I think.

By Spanish economist Jesus Huerta de Soto, author of the excellent book  Money, Bank Credit, and Economic Cycles  , the article is called “An Austrian Defense of the Euro.” Something I hadn’t thought was possible.

De Soto argues, first of all, that all good Austrians should be in favour of fixed, not floating, exchange rates.  This might come as a shock. He argues however that the fiscal discipline required by fixed exchange rates is at least something like the fiscal discipline required by the classical gold standard, which puts a check on governmental plans for easy money.  He quotes Hayek from 1975:

It is, I believe, undeniable that the demand for flexible rates of exchange originated wholly from countries such as Great Britain, some of whose economists wanted a wider margin for inflationary expansion (called "full employment policy"). They later received support, unfortunately, from other economists[4] who were not inspired by the desire for inflation, but who seem to have overlooked the strongest argument in favour of fixed rates of exchange, that they constitute the practically irreplaceable curb we need to compel the politicians, and the monetary authorities responsible to them, to maintain a stable currency
I do not believe we shall regain a system of international stability without returning to a system of fixed exchange rates, which imposes on the national central banks the restraint essential for successfully resisting the pressure of the advocates of inflation in their countries — usually including ministers of finance.

So supporters of fiscal discipline should be in favour of fixed exchange rates-on the understanding that the self-correcting mechanisms for within this system are similar to those of the classical gold standard, and the resulting restraints on government therefrom are a feature, not a bug.

And as he points out, the EuroZone is nothing if not a a zone within exchange rates are fixed—the consequence now being that those economies and those governments who displayed insufficient rectitude are now seeing their fiscal chickens come home to roost.

This, he argues is not a bad thing. It’s not even a good thing. It is, he says, a great thing.  Because, like a mirror, the discipline of the EuroZone reflects back to players the consequences of their own actions.

The arrival of the Great Recession of 2008 has even further revealed to everyone the disciplinary nature of the euro: for the first time, the countries of the monetary union have had to face a deep economic recession without monetary-policy autonomy. Up until the adoption of the euro, when a crisis hit, governments and central banks invariably acted in the same way: they injected all the necessary liquidity, allowed the local currency to float downward and depreciated it, and indefinitely postponed the painful structural reforms that where needed and that involve economic liberalization, deregulation, increased flexibility in prices and markets (especially the labour market), a reduction in public spending, and the withdrawal and dismantling of union power and the welfare state. With the euro, despite all the errors, weaknesses, and concessions we will discuss later, this type of irresponsible behaviour and forward escape has no longer been possible.

For instance, in Spain, in just one year, two consecutive governments have been forced to take a series of measures that, though still quite insufficient, up to now would have been labelled as politically impossible and utopian, even by the most optimistic observers:

  1. article 135 of the Spanish Constitution has been amended to include the anti-Keynesian principle of budget stability and equilibrium for the central government, the autonomous communities, and the municipalities;

  2. all of the projects that imply increases in public spending, vote purchasing, and subsidies, projects on which politicians regularly based their action and popularity, have been suddenly suspended;

  3. the salaries of all public servants have been reduced by 5 percent and then frozen, while their work schedule has been expanded;

  4. social-security pensions have been frozen de facto;

  5. the standard retirement age has been raised across the board from 65 to 67;

  6. the total budgeted public expenditure has decreased by over 15 percent; and

  7. significant liberalization has occurred in the labor market, business hours, and in general, the tangle of economic regulation.[7]

Furthermore, what has happened in Spain is also taking place in Ireland, Portugal, Italy, and even in countries which, like Greece, until now represented the paradigm of social laxity, the lack of budget rigor, and political demagoguery.[8] What is more, the political leaders of these five countries, now no longer able to manipulate monetary policy to keep citizens in the dark about the true cost of their policies, have been summarily thrown out of their respective governments. And states that, like Belgium and especially France and Holland, until now have appeared unaffected by the drive to reform are also starting to be forced to reconsider the very grounds for the volume of their public spending and for the structure of their bloated welfare state. This is all undeniably due to the new monetary framework introduced with the euro, and thus it should be viewed with excited and hopeful rejoicing by all champions of the free-enterprise economy and the limitation of government powers.

There is more, much more, and all of it worth thinking through—especially the motivations of those who both oppose and support the  present set-up, and its collapse: on one side the Europeans who purposely set up a system in which more profligate countries got to use the money and the credit rating of Germany—and on this side too those Americans who realised that as long as it was set up that way the Euro would never take over Reserve Currency status from the US dollar.

And opposing the Euro are the Keynesians who complain about the Euro’s straitjacket, not allowing within the EuroZone to push monetary stimulus at a time (like now) of economic crisis.

As Margaret Thatcher famously pointed out, one primary problem with socialism is you eventually run out of other people’s money. De Soto argues the European Monetary Union makes the running out crystal clear, and requires honest means by which to repair the situation—and as such advocates of freedom and sound money should support it.

It’s worth thinking about: “An Austrian Defense of the Euro.”


  1. "De Soto argues, first of all, that all good Austrians should be in favour of fixed, not floating, exchange rates. This might come as a shock."

    It does. But the obvious problem with this is that it is all too easy for governments not to play by the rules. Has any government ever let their money supply change in the way a fixed exchange rate requires? No I can't think of one either.

  2. I guess his point would be that if they don't play by the rules reality will come back and bite them.

    Historically, it's certainly true that for half a century more than half the planet did play by the rules of the classical gold standard. The primary difference between now and then, in this respect, is the dire influence of the Keynesian/Mercantilist model of today, which allows govts and voters to think they can eat their cake and print it too.

    Some system whereby reality is able to directly reassert itself when they do is surely admirable, no?

  3. that Tom Hunter said...

    The problem I have with this line of argument is that the "hardline" solutions are not really solutions that are building anything.

    Witness the Financial Times article a few days ago describing the supplier of a heart monitoring machine. He can't sell to the Greek hospital because his German suppliers demand cash not credit, and his bank won't advance the credit. That's because those banks are now acting as nothing more than sluices for all the bailout money that flows through them back to non-Greek banks and other non-Greek institutions. The bank is merely a shell that has no credit to extend, despite its "bailout" - as is Greece itself. So no real liquidation of malinvestments and no real recovery, just an overall collapse (and entire country as a malinvestment? Hmmmm).

    I guess it will "work" if Greece depopulates like the South Island West Coast or Alaska after the gold rushes, but it's a huge ask to think that can be done with a traditionally nationalist people, especially in service of building a United States of Europe.

    Even if that is the intention, it would be better to just have a Eurozone with core countres that already have the culture to support a Euro, while leaving Greece and others free to follow their traditional non-business culture: constantly devalue their own currency and send their productive people to those economically superior Eurozone places (e.g. Estonia). You still end up with a depopulated Greece that's mostly around tourism and rich foreigners beach houses, but it would probably be slower and less painful to everybody than this method.

  4. One problem I have with the list of items previously considered impossible to achieve is the expansion of work time required of civil servants. I think it would be better if they told them not to come to work at all. If they are at home they are not designing regulations defining what we the citizenry cannot do, and not identifying favoured projects to lavish taxpayer money on. I wish more of our civil servants would stay at home.
    Jeff W

  5. While I'm waiting for IRD to ring me back I'll put in my gold bars worth.

    I see both sides of this: your new position, Peter, and Paul's, however, what sways it for me (toward your former position) is that it was never possible to leave this at just being an economic union: I don't believe you can separate economics/ies, politics and philosophy, so the euro always had overriding political and cultural drives toward the centralised planning of Europe. Just last week the Spanish President was asking for what Stalin never could achieve: a central agency to plan the economies, and hence, inevitably, individual lives, of all of Europe.

    And that's why the monetary union is a disaster.

    ... also - where the hell is IRD, fifteen minutes now - there's something even deeper than this, which is what I clumsily meant my bringing culture into it. Economics only works on the micro-level: you and me doing an individual transaction to meet our needs and desires; once you take attention way from the complexity of individual motivation and start talking of aggregates, then you end up with Keynes. Thus, surely an argument against centralised economic unions - culturally a Greek spender is not an Italian spender is not a French spender, etc, thus the closer you can keep your economics to the individual transaction the better the market mechanism will work.

    Of course, I might be wrong ...

  6. Contrast the PIIGS with the UK where the Bank of England is in control of the money supply. Because of the BoE the value of sterling has plummeted and the cost for government to finance itself is at all-time historical low. Both of these effects have come at the expense of savers, and meanwhile government spending has barely abated, whatever the left-wing media says about the so-called 'cuts'.

    The PIIGS on the other hand are cutting government expenditure left, right and centre. There, the public service is bearing the brunt; in the UK it's savers and the middle classes.

    The main thing missing from the resolution of the PIIGs' problems is a major debt default. Lenders must bear their share of the pain for lending to a borrower that obviously couldn't afford it.

  7. Agreed, what we do is we become the 9th state of Australia, sack their PM, and get a fixed $AUD

  8. Having lived in Europe and experienced the annoyance and expense of having multiple currencies to deal in, a single currency is great. It's bad enough dealing in just two [US$ vs NZ$] but multiple currencies means bigger bites by the money exchange industry.

    Discussing whether a Eurostate currency or multiple Fiefdom state currencies is better is a bit like discussing whether slave driving should be done by whips or cattle prods. One might be slightly less life threatening, but both are evil incarnate.

    Euroserfs are stuck with a huge centrally planned and swindled self-dealing monetary system.

    Freedom to choose market-based money is the way to go. State-based systems lead to calamity. Money should be free market.

    Bitcoin is a start.


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