I’ve changed my mind about the Euro
Should 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 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:
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;
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;
the salaries of all public servants have been reduced by 5 percent and then frozen, while their work schedule has been expanded;
social-security pensions have been frozen de facto;
the standard retirement age has been raised across the board from 65 to 67;
the total budgeted public expenditure has decreased by over 15 percent; and
significant liberalization has occurred in the labor market, business hours, and in general, the tangle of economic regulation.
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. 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.”