All Roads Lead to (Ancient) Rome
The old empire could teach us a thing or two about the euro and its flaws.
Europe enjoyed a common currency regime 2,000 years
ago. Back then, as today, there was no single common language, rather limited
workforce mobility, and quite an active trade network. The Roman Empire brought
relative internal peace to a wide area never to be united again. And it brought
the sestertius—or, to be more accurate, a coinage of gold, silver,
and bronze of which the bronze sestertius became the most
commonly spread denomination. It certainly lacked a central bank, but it lasted
for many centuries.
As a severe and predictable European debt crisis is
slowly unfolding, it seems unlikely that the euro will achieve anything
approaching the success or longevity of its distant predecessor. What went
wrong, beyond the lack of political vision that is the only thing European
governments seem to share?
Europe’s fundamental sin is actually simple. The
Maastricht Treaty of 1992, in creating a single legal tender and monopolistic
currency for the countries that ratified it, fundamentally undermined the very
founding principle it ostensibly enshrined: that of “subsidiarity,” or the
principle that holds it is always better for a matter to be handled at a local
level than by a centralized authority.
The peculiarity of the Roman political system was
indeed its taste for subsidiarity. The imperial government was usually quite
happy to restrict itself to the essentials—mainly military defense and the rule
of law—while devolving to local civic authorities most of the burden of
managing their own issues. As such, the cities and regions, notably in the
Greek or Syriac-speaking East, struck their own lower-value bronze coins as a
complement to the usually higher-value imperial coins, leading to specific
monetary zones.
As a result, the issuance of local money was to a
large extent a local matter. Gaius, the second-century jurist, wrote that
“money, although it should enjoy the same power of purchasing everywhere, is
easier to obtain in some locations and interest rates are lower, while it is
harder to find in other locations and interest rates are higher.” (Would that
he were available today for a powwow with Mario Draghi, president of the
European Central Bank.)
We are touching here on the essential shortcoming of
the euro. Since its creation, Greek, Spanish, and Irish banks and governments
have been able to borrow like Germans, Austrians, or the Dutch, under the cover
of what was perceived to be the implicit uniformity and guarantee of the euro.
As such, the common currency fueled insane property bubbles and equally insane
public and private indebtedness and corruption. Logically, internal trade
imbalances and competitive gaps kept widening. To simplify, life under that
common currency regime has been like telling wolves and sheep to enjoy freedom
together in open fields, while the suggested write-down on the Greek debt is
equivalent to providing more grass to those sheep in the hope they will last
longer. Incidentally, if consulted, the sheep may say no to the bailout package
and the euro altogether.
America is not so different. There, an even more
general asset and liability bubble has expanded under the influence of the low
interest rates, counterproductive tax system, and lax regulatory environment
that have prevailed for most of the past two decades. Only the dominance of
federal over local government debts, the facilities offered by holding the
world reserve currency, and the stabilizing role of a few very large foreign
sovereign investors effectively funding American consumers through massive
purchases of U.S. assets have prevented something similar to (or worse than)
the European debt crisis from happening—so far. The current path is neither
sustainable nor desirable.
Ancient Rome teaches us two things. The first is that
there should be some explicit quantitative policy regarding monetary creation.
Ancient economies’ monetary aggregates were capped by the availability of
precious metals. Counting on private borrowers to create money leads
post-gold-exchange-standards economies to a dangerous dependence on profligacy.
This fuels a general sense of irresponsibility at all levels of our societies.
Political authorities should not be thinking of ways to encourage essentially
bankrupt consumers to borrow more. Consumers should stop thinking of themselves
as consumers, reflect on what they bring to the outside world, and adjust their
expectations accordingly. Wealth should be a consequence of adding more value,
not of borrowing more.
By the same token, the access to unlimited funding,
directly responsible for fueling reckless corporate-governance practices,
should be curtailed. Flooding the capital markets with dollars has only
resulted in a general cash glut at the higher end of the wealth scale while
pushing the lower strata of the population into a real deflationary situation,
contributing to unacceptable levels of inequality. In not facing these
fundamental challenges, current governments will encourage social unrest and
force their successors to adopt a combination of predatory taxation, sovereign
default, inflation, and devaluation, with unfavorable demographics compounding
all these issues.
The second lesson, the devolution of the monetary
monopoly of the state, leads to the concept of local (or specific-purpose)
subsidiary currencies. People are familiar with air miles, coupons, rewards,
and tokens. This could be generalized inside economic zones or even virtual
networks. Those who find themselves unwilling or unable to monetize their skills
under the mainstream currency system, or who have lost access to credit, should
be able to exchange their potential output through local units of account and
barter. In doing so they would stand a chance of reintegration into a more open
society.
Concerns about taxation and the central currency
monopoly are misguided. Any positive contribution, taxed or not, is better than
inactivity or, worse, social parasitism.
Still, today, all roads lead to Rome.
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