An Almost Golden Currency
by Jesus Huerta
de Soto
1. Introduction:
The Ideal Monetary System
Theorists of the Austrian
School have focused considerable effort on elucidating the ideal monetary
system for a market economy. On a theoretical level, they have developed an
entire theory of the business cycle that explains how credit expansion unbacked
by real saving and orchestrated by central banks via a
fractional-reserve-banking system repetitively generates economic cycles. On a
historical level, they have described the spontaneous evolution of money and
how coercive state intervention encouraged by powerful interest groups has
distanced from the market and corrupted the natural evolution of banking
institutions. On an ethical level, they have revealed the general legal
requirements and principles of property rights with respect to banking
contracts, principles that arise from the market economy itself and that, in
turn, are essential to its proper functioning.[1]
All of the above theoretical
analysis yields the conclusion that the current monetary and banking system is
incompatible with a true free-enterprise economy, that it contains all of the
defects identified by the theorem of the impossibility of socialism, and that
it is a continual source of financial instability and economic disturbances.
Hence, it becomes indispensable to profoundly redesign the world financial and
monetary system, to get to the root of the problems that beset us and to solve
them. This undertaking should rest
on the following three reforms:
1. the reestablishment of a 100 percent reserve requirement as an essential principle of private-property rights with respect to every demand deposit of money and its equivalents;
2. the abolition of all central banks (which become unnecessary as lenders of last resort if reform 1 above is implemented, and which as true financial central-planning agencies are a constant source of instability) and the revocation of legal-tender laws and the always-changing tangle of government regulations that derive from them; and
3. a return to a classic gold standard, as the only world monetary standard that would provide a money supply that public authorities could not manipulate and that could restrict and discipline the inflationary yearnings of the different economic agents.[2]
2. The Austrian
Tradition of Support for Fixed Exchange Rates versus Monetary Nationalism and
Flexible Exchange Rates
Traditionally, members of the
Austrian School of economics have felt that as long as the ideal monetary
system is not achieved, many economists, especially those of the Chicago
School, commit a grave error of economic theory and political praxis when they
defend flexible exchange rates in a context of monetary nationalism, as if both
were somehow more suited to a market economy. In contrast, Austrians believe
that until central banks are abolished and the classic gold standard is
reestablished along with a 100 percent reserve requirement in banking, we must
make every attempt to bring the existing monetary system closer to the ideal,
both in terms of its operation and its results. This means limiting monetary
nationalism as far as possible, eliminating the possibility that each country
could develop its own monetary policy, and restricting inflationary policies of
credit expansion as much as we can, by creating a monetary framework that
disciplines as far as possible economic, political, and social agents, and
especially labor unions and other pressure groups, politicians, and central
banks.
It is only in this context
that we should interpret the position of such eminent Austrian economists (and
distinguished members of the Mont Pèlerin Society) as Mises and Hayek. For
example, there is the remarkable and devastating analysis against monetary
nationalism and flexible exchange rates that Hayek began to develop in 1937 in
his particularly outstanding book Monetary Nationalism
and International Stability.[3] In this book, Hayek
demonstrates that flexible exchange rates preclude an efficient allocation of
resources on an international level, as they immediately hinder and distort
real flows of consumption and investment. Moreover, they make it inevitable
that the necessary real downward adjustments in costs take place via a rise in
all other nominal prices, in a chaotic environment of competitive devaluations,
credit expansion, and inflation, which also encourages and supports all sorts
of irresponsible behaviors from unions by inciting continual wage and labor
demands that can only be satisfied without increasing unemployment if inflation
is pushed up even further.
Thirty-eight years later, in
1975, Hayek summarized his argument as follows:
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 favor 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. (emphasis added)
To clarify his argument yet
further, Hayek adds,
The maintenance of the value of money and the avoidance of inflation constantly demand from the politician highly unpopular measures. Only by showing that government is compelled to take these measures can the politician justify them to people adversely affected. So long as the preservation of the external value of the national currency is regarded as an indisputable necessity, as it is with fixed exchange rates, politicians can resist the constant demands for cheaper credits, for avoidance of a rise in interest rates, for more expenditure on "public works," and so on. With fixed exchange rates, a fall in the foreign value of the currency, or an outflow of gold or foreign exchange reserves acts as a signal requiring prompt government action.[5] With flexible exchange rates, the effect of an increase in the quantity of money on the internal price level is much too slow to be generally apparent or to be charged to those ultimately responsible for it. Moreover, the inflation of prices is usually preceded by a welcome increase in employment; it may therefore even be welcomed because its harmful effects are not visible until later.
Hayek concludes,
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. (Hayek 1979 [1975], pp. 9–10)
With respect to Ludwig von
Mises, it is well known that he distanced himself from his valued disciple
Fritz Machlup when in 1961 Machlup began to defend flexible exchange rates in
the Mont Pèlerin Society. In fact, according to R.M. Hartwell, who was the
official historian of the Mont Pèlerin Society, "Machlup's support of
floating exchange rates led von Mises to not speak to him for something like
three years" (Hartwell 1995, 119). Mises could understand how
macroeconomists with no academic training in capital theory, like Friedman and
his Chicago colleagues, and also Keynesians in general, could defend flexible
rates and the inflationism invariably implicit in them, but he was not willing
to overlook the error of someone who, like Machlup, had been his disciple and
therefore really knew about economics, and yet allowed himself to be carried
away by the pragmatism and passing fashions of political correctness. Indeed,
Mises even remarked to his wife on the reason he was unable to forgive Machlup:
"He was in my seminar in Vienna; he understands everything. He knows more
than most of them and he knows exactly what he is doing" (Margit von Mises
1984, 146).
Mises's defense of fixed
exchange rates parallels his defense of the gold standard as the ideal monetary
system on an international level. For instance, in 1944, in his book Omnipotent Government,
Mises wrote,
The gold standard put a check on governmental plans for easy money. It was impossible to indulge in credit expansion and yet cling to the gold parity permanently fixed by law. Governments had to choose between the gold standard and their — in the long run disastrous — policy of credit expansion. The gold standard did not collapse. The governments destroyed it. It was incompatible with etatism as was free trade. The various governments went off the gold standard because they were eager to make domestic prices and wages rise above the world market level, and because they wanted to stimulate exports and to hinder imports. Stability of foreign exchange rates was in their eyes a mischief, not a blessing. Such is the essence of the monetary teachings of Lord Keynes. The Keynesian School passionately advocates instability of foreign exchange rates.[6] (emphasis added)
Furthermore, it comes as no
surprise that Mises scorned the Chicago theorists when in this area, as in
others, they ended up falling into the trap of the crudest Keynesianism. In
addition, Mises maintained that it would be relatively simple to reestablish
the gold standard and return to fixed exchange rates: "The only condition
required is the abandonment of an easy money policy and of the endeavors to
combat imports by devaluation."
Moreover, Mises held that only
fixed exchange rates are compatible with a genuine democracy, and that the
inflationism behind flexible exchange rates is essentially antidemocratic:
Inflation is essentially
antidemocratic. Democratic control is budgetary control. The government has but
one source of revenue — taxes. No taxation is legal without parliamentary
consent. But if the government has other sources of income it can free itself
from their control. (Mises 1969, pp. 251–253)
Only when exchange rates are
fixed are governments obliged to tell citizens the truth. Hence, the temptation
to rely on inflation and flexible rates to avoid the political cost of
unpopular tax increases is so strong and so destructive. So, even if there is
not a gold standard, fixed rates restrict and discipline the arbitrariness of
politicians:
Even in the absence of a pure gold standard, fixed exchange rates provide some insurance against inflation which is not forthcoming from the flexible system. Under fixity, if one country inflates, it falls victim to a balance of payment crisis. If and when it runs out of foreign exchange holdings, it must devalue, a relatively difficult process, fraught with danger for the political leaders involved. Under flexibility, in contrast, inflation brings about no balance of payment crisis, nor any need for a politically embarrassing devaluation. Instead, there is a relatively painless depreciation of the home (or inflationary) currency against its foreign counterparts. (Block 1999, p. 19, emphasis added)
3. The Euro as a
"Proxy" for the Gold Standard (or Why Champions of Free Enterprise
and the Free Market Should Support the Euro While the Only Alternative Is a
Return to Monetary Nationalism)
As we have seen, Austrian
economists defend the gold standard because it curbs and limits the arbitrary
decisions of politicians and authorities. It disciplines the behavior of all
the agents who participate in the democratic process. It promotes moral habits
of human behavior. In short, it checks lies and demagoguery; it facilitates and
spreads transparency and truth in social relationships. No more and no less.
Perhaps Ludwig von Mises said it best:
The gold standard makes the
determination of money's purchasing power independent of the changing ambitions
and doctrines of political parties and pressure groups. This is not a defect of
the gold standard, it is its main excellence. (Mises 1966, p. 474)
The introduction of the euro
in 1999 and its culmination beginning in 2002 meant the disappearance of
monetary nationalism and flexible exchange rates in most of continental Europe.
Later we will consider the errors committed by the European Central Bank (ECB).
Now what interests us is to note that the different member states of the
monetary union completely relinquished and lost their monetary autonomy, that
is, the possibility of manipulating their local currency by placing it at the
service of the political needs of the moment. In this sense, at least with
respect to the countries in the eurozone, the euro began to act and continues
to act very much like the gold standard did in its day. Thus, we must view the
euro as a clear, true, even if imperfect, step toward the gold standard.
Moreover, 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 labor 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 behavior 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
labeled 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. For it is hard to conceive of any of these
measures being taken in a context of a national currency and flexible exchange
rates: whenever they can, politicians eschew unpopular reforms, and citizens
everything that involves sacrifice and discipline. Hence, in the absence of the
euro, authorities would again have taken what up to now has been the usual path
— i.e. a forward escape consisting of more inflation; the depreciation of the
currency to recover "full employment" and gain competitiveness in the
short term (covering their backs and concealing the grave responsibility of
labor unions as true generators of unemployment); and, in short, the indefinite
postponement of the necessary structural reforms.
Let us now focus on two
significant ways the euro is unique. We will contrast it both with the system
of national currencies linked together by fixed exchange rates, and with the
gold standard itself, beginning with the latter. We must note that abandoning
the euro is much more difficult than going off the gold standard was in its
day. In fact, the currencies linked with gold kept their local denomination
(the franc, the pound, etc.), and thus it was relatively easy, throughout the
1930s, to unanchor them from gold, insofar as economic agents, as indicated in
the monetary-regression theorem Mises formulated in 1912 (Mises 2009 [1912],
pp. 111–123), continued without interruption to use the national currency,
which was no longer exchangeable for gold, relying on the purchasing power of
the currency right before the reform. Today this possibility does not exist for
those countries that wish, or are obliged, to abandon the euro.
Because the euro is the only
unit of currency shared by all the countries in the monetary union, its
abandonment requires the introduction of a new local currency, with unknown and
much less purchasing power, and includes the emergence of the immense
disturbances that the change would entail for all the economic agents in the
market: debtors, creditors, investors, entrepreneurs, and workers.[9] At least in this
specific sense, and from the standpoint of Austrian theorists, we must admit
that the euro surpasses the gold standard, and that it would have been very
useful for mankind if in the 1930s the different countries involved had been obliged
to stay on the gold standard, because as is the case today with the euro, any
other alternative was nearly impossible to put into practice and would have
affected citizens in a much more damaging, painful, and obvious way.
Hence, to a certain extent it
is amusing (and also pathetic) to note that the legion of social engineers and
interventionist politicians who, led at the time by Jacques Delors, designed
the single currency as one more tool for use in their grandiose projects to
achieve a European political union, now regard with despair something they
never seem to have been able to predict: that the euro has ended up acting de
facto as the gold standard, disciplining citizens, politicians, and
authorities, tying the hands of demagogues and exposing pressure groups (headed
by the unfailingly privileged unions), and even questioning the sustainability
and the very foundations of the welfare state.[10]
According to the Austrian
School, this is precisely the main comparative advantage of the euro as a
monetary standard in general, and against monetary nationalism in particular —
this and not the more prosaic arguments, like "the reduction of
transaction costs" or "the elimination of exchange risk," which
were deployed at the time by the invariably short-sighted social engineers of
the moment.
Now let us consider the
difference between the euro and a system of fixed exchange rates, with respect
to the adjustment process that takes place when different degrees of credit
expansion and intervention arise between the different countries. Obviously, in
a fixed-rate system, these differences manifest themselves in considerable
exchange-rate tensions that eventually culminate in explicit devaluations and
the high cost in terms of lost prestige, which, fortunately, these entail for
the corresponding political authorities. In the case of a single currency, like
the euro, such tensions manifest themselves in a general loss of competitiveness,
which can only be recovered with the introduction of the structural reforms
necessary to guarantee market flexibility, along with the deregulation of all
sectors and the reductions and adjustments necessary in the structure of
relative prices.
Moreover, the above ends up
affecting the revenues of each public sector, and thus, of its credit rating.
In fact, under the present circumstances, in the euro area, the current value
in the financial markets of each country's sovereign public debt has come to
reflect the tensions that typically revealed themselves in exchange-rate
crises, when rates were more or less fixed in an environment of monetary
nationalism.
Therefore, at this time, the
leading role is not played by foreign-currency speculators but by the rating
agencies, and especially by international investors, who, by purchasing
sovereign debt or not, are healthily setting the pace of reform while also
disciplining and determining the fate of each country. This process may be
called "undemocratic," but it is actually the exact opposite. In the
past, democracy suffered chronically and was corrupted by irresponsible
political actions based on monetary manipulation and inflation, a veritable tax
of devastating consequences, that is imposed outside of parliament on all
citizens in a gradual, concealed, and devious way.
Today, with the euro, the
recourse to an inflationary tax has been blocked, at least at the local level
of each country, and politicians have suddenly been exposed and have been
obliged to tell the truth and accept the corresponding loss of support.
Democracy, if it is to work, requires a framework that disciplines the agents
who participate in it. And today in continental Europe that role is being
played by the euro. Hence, the successive fall of the governments of Ireland,
Greece, Portugal, Italy, Spain, and France, far from revealing a democracy
deficit, manifests the increasing degree of rigor, budget transparency, and
democratic health that the euro is encouraging in its respective societies.
4. The Diverse
and Motley "Anti-Euro Coalition"
As it would be interesting and
highly illustrative, we should now, if only briefly, comment on the diverse and
motley amalgam formed by the euro's enemies. This group includes in its ranks
such disparate elements as doctrinaires of the far left and right; nostalgic or
unyielding Keynesians like Krugman and Stiglitz; dogmatic monetarists in
support of flexible exchange rates, like Barro and others; naive advocates of
Mundell's theory of optimum currency areas; terrified dollar (and pound)
chauvinists; and, in short, the legion of confused defeatists who "in the
face of the imminent disappearance of the euro" propose the
"solution" of blowing it up and abolishing it as soon as possible.[11]
Perhaps the clearest
illustration (or rather, the most convincing piece of evidence) of the fact
that Mises was entirely correct in his analysis of the disciplining effect of
fixed exchange rates, and especially of the gold standard, on political and
union demagoguery lies in the way in which the leaders of leftist political
parties, union members, "progressive" opinion makers, antisystem "indignados," far-right
politicians, and, in general, all fans of public spending, state subsidies, and
interventionism openly and directly rebel against the discipline the euro
imposes, and specifically against the loss of autonomy in each country's
monetary policy and what that implies: the much-reviled dependence on markets,
speculators, and international investors when it comes to being able (or not)
to sell the growing sovereign public debt required to finance continual public
deficits.
One need only glance at the
editorials in the most leftist newspapers,[12] or read the statements
of the most demagogic politicians,[13] or of leading unionists,
to observe that this is so, and that nowadays, just as in the 1930s with the
gold standard, the enemies of the market and the defenders of socialism, the
welfare state, and union demagoguery are protesting in unison, both in public
and in private, against "the rigid discipline the euro and the financial
markets are imposing on us," and they are demanding the immediate
monetization of all the public debt necessary, without any countermeasure in
the form of budget austerity or reforms that boost competitiveness.
In the more academic sphere,
but also with ample coverage in the media, contemporary Keynesian theorists are
mounting a major offensive against the euro, again with a belligerence only
comparable to that Keynes himself showed against the gold standard in the
1930s. Especially paradigmatic is the case of Krugman,[14] who as a syndicated
columnist tells the same old story almost every week about how the euro means a
"straitjacket" for employment recovery, and he even goes so far as to
criticize the profligate American government for not being expansionary enough
and for having fallen short in its (huge) fiscal stimulus packages.[15] More intelligent and
highbrow, though no less mistaken, is the opinion of Skidelsky, since he at
least explains that the Austrian business-cycle theory[16] offers the only
alternative to his beloved Keynes and clearly recognizes that the current
situation actually involves a repeat of the duel between Hayek and Keynes
during the 1930s.[17]
Stranger still is the stance
taken on flexible exchange rates by neoclassical theorists in general, and by
monetarists and members of the Chicago School in particular.[18] It appears that this
group's interest in flexible exchange rates and monetary nationalism
predominates over their (we presume sincere) desire to encourage economic
liberalization reforms. Indeed, their primary goal is to maintain
monetary-policy autonomy and be able to devalue (or depreciate) the local
currency to "recover competitiveness" and absorb unemployment as soon
as possible, and only then, eventually, do they focus on trying to foster
flexibility and free-market reforms.
Their naïveté is extreme, and
we referred to it in our discussion of the reasons for the disagreement between
Mises, on the side of the Austrian School, and Friedman, on the side of the
Chicago theorists, in the debate on fixed versus flexible exchange rates. Mises
always saw very clearly that politicians are not likely to take steps in the
right direction if they are not literally obligated to do so, and that flexible
rates and monetary nationalism remove practically every incentive capable of
disciplining politicians and doing away with "downward rigidity" in
wages (which thus becomes a sort of self-fulfilling assumption that monetarists
and Keynesians wholeheartedly accept) and with the privileges enjoyed by unions
and all other pressure groups. Mises also observed that as a result, in the
long run, and even in spite of themselves, monetarists end up becoming fellow
travelers of the old Keynesian doctrines: once "competitiveness" has
been "recovered," reforms are postponed, and what is even worse,
unionists become accustomed to having the destructive effects of their
restrictionist policies continually masked by successive devaluations.
This latent contradiction
between defending the free market and supporting monetary nationalism and
manipulation via "flexible" exchange rates is also evident in many
proponents of the most widespread interpretation of Robert A. Mundell's theory
of "optimum currency areas."[19] Such areas would be
those in which, to begin with, all productive factors were highly mobile,
because if that is not the case, it would be better to compartmentalize them
with currencies of a smaller scope, to permit the use of an autonomous monetary
policy in the event of any "external shock." However, we should ask
ourselves, Is this reasoning sound? Not at all: the main source of rigidity in
labor and factor markets actually lies in, and is sanctioned by, intervention
and state regulation of the markets, so it is absurd to think states and their
governments are going to commit hara-kiri first, thus relinquishing their power
and betraying their political clientele, in order to adopt a common currency
afterward.
Instead, the exact opposite is
true: only when politicians have joined a common currency (the euro in our
case) have they been forced to implement reforms that until very recently it
would have been inconceivable for them to adopt. In the words of Walter Block,
government is the main or only source of factor immobility. The state, with its regulations … is the prime reason why factors of production are less mobile than they would otherwise be. In a bygone era the costs of transportation would have been the chief explanation, but with all the technological progress achieved here, this is far less important in our modern "shrinking world." If this were so, then under laissez-faire capitalism, there would be virtually no factor immobility. Given even the approximate truth of these assumptions the Mundellian region then becomes the entire globe — precisely as it would be under the gold standard.[20]
This conclusion of Block's is
equally applicable to the euro area, to the extent that the euro acts, as we
have already indicated, as a "proxy" for the gold standard, which
disciplines and limits the arbitrary power of the politicians of the member
states.
We must not fail to stress
that Keynesians, monetarists, and Mundellians are all mistaken because they
reason exclusively in terms of macroeconomic aggregates, and hence they
propose, with slight differences, the same sort of adjustment via monetary and
fiscal manipulation, "fine tuning," and flexible exchange rates. They
believe that all of the effort it takes to overcome the crisis should therefore
be guided by macroeconomic models and social engineering. Thus, they completely
disregard the profound microeconomic distortion that monetary (and fiscal)
manipulation generates in the structure of relative prices and in the
capital-goods structure. A forced devaluation (or depreciation) is "one
size fits all," i.e., it entails a sudden linear percentage drop in the
price of consumer goods and services and productive factors, a drop that is the
same for everyone.
Although in the short term
this gives the impression of an intense recovery of economic activity and of a
rapid absorption of unemployment, it actually completely distorts the structure
of relative prices (because, without monetary manipulation, some prices would
have fallen more, others less, and others would not have fallen at all and
might even have risen), leads to a widespread poor allocation of productive
resources, and causes a major trauma that any economy would take years to
process and recover from.[21] This is the
microeconomic analysis centered on relative prices and
theproductive structure, which Austrian theorists have
characteristically developed[22] and which, in contrast,
is entirely missing from the analytical toolbox of the assortment of economic
theorists who oppose the euro.
Finally, outside the purely
academic sphere, the tiresome insistence with which Anglo-Saxon economists,
investors, and financial analysts attempt to discredit the euro by foretelling
the bleakest future for it is to a certain extent suspicious. This impression
is reinforced by the hypocritical position of the different US administrations
(and also, to a lesser extent, the British government) in wishing
(halfheartedly) that the eurozone would "get its economy in order,"
and yet self-interestedly omitting to mention that the financial crisis
originated on the other side of the Atlantic, i.e., in the recklessness and the
expansionary policies pursued by the Federal Reserve for years, the effects of
which spread to the rest of the world via the dollar, as it is still used as
the international reserve currency. Furthermore, there is almost unbearable
pressure for the eurozone to introduce monetary policies at least as
expansionary and irresponsible ("quantitative easing") as those
adopted in the United States, and this pressure is doubly hypocritical, because
such an occurrence would undoubtedly deliver the coup de grace to the single
European currency.
Might not this stance in the
Anglo-Saxon political, economic, and financial world be hiding a buried fear
that the dollar's future as the international reserve currency may be
threatened if the euro survives and is capable of effectively competing with
the dollar in a not-too-distant future? All indications suggest that this
question is becoming more and more pertinent, and though today it does not
appear very politically correct, it pours salt on the wound that is most
painful for analysts and authorities in the Anglo-Saxon world: the euro is
emerging as an enormously powerful potential rival to the dollar on an
international level.[23]
As we can see, the anti-euro
coalition brings together quite varied and powerful interests. Each distrusts
the euro for a different reason. However, they all share a common denominator:
the arguments that form the basis of their opposition to the euro would be
exactly the same, and they might well repeat and word them even more
emphatically, if instead of the single European currency they had to come to
grips with the classic gold standard as the international monetary system.
In fact, there is a large
degree of similarity between the forces that joined in an alliance in the 1930s
to compel the abandonment of the gold standard and those that today seek (up to
now unsuccessfully) to reintroduce old, outdated monetary nationalism in
Europe.
As we have already indicated,
technically it was much easier to abandon the gold standard than it would be
today for any country to leave the monetary union. In this context, it should
come as no surprise that members of the anti-euro coalition often even fall
back on the most shameless defeatism: they predict a disaster and the
impossibility of maintaining the monetary union, and then right afterward, they
propose the "solution" of dismantling it immediately. They even go so
far as to hold international contests (in — where else? — the United Kingdom,
the home of both Keynes and monetary nationalism) in which hundreds of
"experts" and crackpots participate, each with his own proposals for
the best and most innocuous way to blow up the European monetary union.[24]
No one can deny that the
European Union chronically suffers from a number of serious economic and social
problems. Nevertheless, the maligned euro is not one of them. Rather, the
opposite is true: the euro is acting as a powerful catalyst that reveals the
severity of Europe's true problems and hastens or "precipitates" the
implementation of the measures necessary to solve them. In fact, today, the
euro is helping spread more than ever the awareness that the bloated European
welfare state is unsustainable and needs to be substantially reformed.[26] The same can be said for
the all-encompassing aid and subsidy programs, among which the Common
Agricultural Policy occupies a key position, both in terms of its very damaging
effects and its total lack of economic rationality.[27]
Most of all, it can be said
for the culture of social engineering and oppressive regulation that, on the
pretext of harmonizing the legislation of the different countries, fossilizes
the single European market and prevents it from being a genuine free market.[28] Now more than ever, the
true cost of all these structural flaws is becoming apparent in the euro area:
without an autonomous monetary policy, the different governments are being
forced to reconsider (and when applicable, to reduce) all their public-expenditure
items, and to attempt to recover and gain international competitiveness by
deregulating and increasing as far as possible the flexibility of their markets
(especially the labor market, which has traditionally been very rigid in many
countries of the monetary union).
In addition to the above
cardinal sins of the European economy, we must add another, which is perhaps
even graver, due to its peculiar, devious nature. We are referring to the great
ease with which European institutions, many times because of a lack of vision,
leadership, or conviction about their own project, allow themselves to become
entangled in policies that in the long run are incompatible with the demands of
a single currency and of a true free single market.
First, it is surprising to
note the increasing regularity with which the burgeoning and stifling new
regulatory measures are introduced into Europe from the Anglo-Saxon academic
and political world, specifically the United States,[29] and often when such
measures have already proven ineffective or extremely disruptive. This
unhealthy influence is a long-established tradition. (Let us recall that
agricultural subsidies, the antitrust legislation, and regulations concerning
"corporate social responsibility" have actually originated, like many
other failed interventions, in the United States.) Nowadays such regulatory
measures crop up repeatedly and are reinforced at every step, for example with
respect to the so-called fair market value and the rest of the International
Accounting Standards, or to the (until now, fortunately, failed) attempts to
implement the so-called agreements of Basel III for the banking sector and
Solvency II for the insurance sector, both of which suffer from insurmountable
and fundamental theoretical deficiencies as well as serious problems in
relation to their practical application.[30]
A second example of the
unhealthy Anglo-Saxon influence can be found in the European Economic Recovery
Plan, which the European Commission launched at the end of 2008 under the
auspices of the Washington Summit, with the leadership of Keynesian politicians
like Barack Obama and Gordon Brown, and on the advice of economic theorists who
are enemies of the euro, like Krugman and others.[31] The plan recommended to
member countries an expansion of public spending of around 1.5 percent of GDP
(some 200 billion euros on an aggregate level). Though some countries, like
Spain, made the error of expanding their budgets, the plan — thank God and the
euro, and much to the despair of Keynesians and their acolytes[32] — soon came to nothing,
once it became clear that it only served to increase the deficits, preclude the
achievement of the Maastricht Treaty objectives, and severely destabilize the
sovereign-debt markets of the countries of the eurozone.
Again, the euro provided a
disciplinary framework and an early curb on the deficit, in contrast to the
budget recklessness of countries that are victims of monetary nationalism, and
specifically, the United States and especially the United Kingdom, which closed
with a public deficit of 10.1 percent of GDP in 2010 and 8.8 percent in 2011,
which on a worldwide scale was only exceeded by Greece and Egypt. Despite such
bloated deficits and fiscal-stimulus packages, unemployment in the United
Kingdom and the United States remains at record (or very high) levels, and
their respective economies are just not getting off the ground.
Third, and above all, there is
mounting pressure for a complete European political union, which some suggest
as the only "solution" that could enable the survival of the euro in
the long term. Apart from the "eurofanatics," who always defend any
excuse that might justify greater power and centralism for Brussels, two groups
coincide in their support for political union. One group consists,
paradoxically, of the euro's enemies, particularly those of Anglo-Saxon origin:
there are the Americans, who, dazzled by the centralized power of Washington
and aware that it could not possibly be duplicated in Europe, know that with
their proposal they are injecting a divisive virus deadly to the euro; and
there are the British, who make the euro an (unjustified) scapegoat on which to
vent their (totally justified) frustrations in view of the growing
interventionism of Brussels. The other group consists of all those theorists
and thinkers who believe that only the discipline imposed by a central
government agency can guarantee the deficit and public-debt objectives
established in Maastricht. This is an erroneous belief. The very mechanism of
the monetary union guarantees, just like the gold standard, that those
countries that abandon budget rigor and stability will see their solvency at
risk and be forced to take urgent measures to reestablish the sustainability of
their public finances if they do not wish to suspend payments.
Despite the above, the most
serious problem does not lie in the threat of an impossible political union,
but in the unquestionable fact that a policy of credit expansion carried out in
a sustained manner by the ECB during a period of apparent economic prosperity
is capable of canceling, at least temporarily, the disciplinary effect exerted
by the euro on the economic agents of each country. Thus, the fatal error of the ECB consists of not having managed to
isolate and protect Europe from the great expansion of credit orchestrated on a
worldwide scale by the US Federal Reserve beginning in 2001.
Over several years, in a
blatant failure to comply with the Maastricht Treaty, the ECB allowed M3 to
grow by even more than 9 percent per year, which far exceeds the objective of
4.5 percent growth in the money supply, an aim originally set by the ECB
itself.[33] Furthermore, even though
this increase was appreciably less reckless than that brought about by the US
Federal Reserve, the money was not distributed uniformly among the countries of
the monetary union, and it had a disproportionate impact on the periphery
countries (Spain, Portugal, Ireland, and Greece), which saw their monetary
aggregates grow at a pace far more rapid, between three and four times more,
than France or Germany. Various reasons can be given to explain this
phenomenon, from the pressure applied by France and Germany, both of which
sought a monetary policy that during those years would not be too restrictive
for them, to the extreme short-sightedness of the periphery countries, which
did not wish to admit they were in the middle of a speculative bubble, as is
the case with Spain, and thus were also unable to give categorical instructions
to their representatives in the ECB council to make an important issue of
strict compliance with the monetary-growth objectives established by the ECB
itself.
In fact, during the years
prior to the crisis, all of these countries, except Greece,[34] easily observed the 3 percent
deficit limits, and some, like Spain and Ireland, even closed their public
accounts with large surpluses.[35] Hence, though the heart
of the European Union was kept out of the American process of irrational
exuberance, the process was repeated with intense virulence in the European
periphery countries, and no one, or very few people, correctly diagnosed the
grave danger in what was happening.[36]
If academics and political
authorities from both the affected countries and the ECB, instead of using
macroeconomic and monetarist analytical tools imported from the Anglo-Saxon
world, had used those of the Austrian business-cycle theory[37] — which after all is a
product of the most genuine continental economic thought — they would have
managed to detect in time the largely artificial nature of the prosperity of
those years, the unsustainability of many of the investments (especially with
respect to real estate development) that were being launched due to the great
easing of credit, and in short, that the surprising influx of rising public
revenue would be of very short duration.
Still, fortunately, though in
the most recent cycle the ECB has fallen short of the standards European
citizens had a right to expect, and we could even call its policy a "grave
tragedy," the logic of the euro as a single currency has prevailed, thus
clearly exposing the errors committed and obliging everyone to return to the
path of control and austerity. In the next section, we will briefly touch on
the specific way the ECB formulated its policy during the crisis and how and on
what points this policy differs from that followed by the central banks of the
United States and United Kingdom.
6. The Euro vs.
the Dollar (and the Pound) and Germany vs. the USA (and the UK)
One of the most striking
characteristics of the last cycle, which has ended in the Great Recession of
2008, has undoubtedly been the differing behavior of the monetary and fiscal
policies of the Anglo-Saxon area, based on monetary nationalism, and those pursued
by the member countries of the European monetary union. Indeed, from the time
the financial crisis and economic recession hit in 2007–2008, both the Federal
Reserve and the Bank of England have adopted monetary policies that have
consisted of reducing the interest rate to almost zero; injecting huge
quantities of money into the economy (euphemistically known as
"quantitative easing"); and continuously, directly, and unabashedly
monetizing the sovereign public debt on a massive scale.[38] To this extremely lax
monetary policy (in which the recommendations of monetarists and Keynesians
concur) is added the strong fiscal stimulus involved in maintaining, both in
the United States and in the United Kingdom, budget deficits close to 10
percent of the respective GDPs (which, nevertheless, at least the most
recalcitrant Keynesians, like Krugman and others, do not consider anywhere near
sufficient).
In contrast with the situation
of the dollar and the pound, in the euro area, fortunately, money cannot so
easily be injected into the economy, nor can budget recklessness be
indefinitely maintained with such impunity. At least in theory, the ECB lacks
authority to monetize the European public debt, and though it has accepted it
as collateral for its huge loans to the banking system, and beginning in the
summer of 2010 even sporadically made direct purchases of the bonds of the most
threatened periphery countries (Greece, Portugal, Ireland, Italy, and Spain),
there is certainly a fundamental economic difference between the behavior of
the United States and United Kingdom, and the policy continental Europe is
following: while monetary aggression and budget recklessness are deliberately,
unabashedly, and without reservation undertaken in the Anglo-Saxon world, in
Europe such policies are carried out reluctantly, and in many cases after
numerous, consecutive and endless "summits." They are the result of
lengthy and difficult negotiations between many parties, negotiations in which
countries with very different interests must reach an agreement.
Furthermore, what is even more
important, when money is injected into the economy and
support is provided to the debt of countries that are having difficulties, such
actions are always balanced with, and taken in exchange for, reforms based on
budget austerity (and not on fiscal stimulus packages) and on the introduction
of supply-side policies that encourage market liberalization and competitiveness.[39] Moreover,
though it would have been better had it happened much sooner, the de facto
suspension of payments by the Greek state, which has given a nearly 75 percent
"haircut" to the private investors who mistakenly trusted in Greek
sovereign debt holdings, has clearly signaled to markets that the other
countries in trouble have no other alternative than to firmly, rigorously, and
without delay carry out all necessary reforms. As we have already seen, even
states like France, which until now appeared untouchable and comfortably
nestled in a bloated welfare state, have lost the highest credit rating on
their debt, seen its differential with the German bund rise, and found
themselves increasingly doomed to introduce austerity and liberalization
reforms to avoid jeopardizing what has always been their indisputable
membership among the eurozone hardliners.[40]
From the political standpoint,
it is quite obvious that Germany (and particularly the chancellor Angela
Merkel) has the leading role in urging forward this whole process of
rehabilitation and austerity (and opposing all sorts of awkward proposals that,
like the issuance of "European bonds," would remove the incentives
the different countries now have to act with rigor). Many times Germany must
swim upstream. For on the one hand, there is constant international political
pressure for fiscal-stimulus measures, especially from the Obama
administration, which is using the "crisis of the euro" as a
smokescreen to hide the failure of its own policies. And on the other hand,
Germany has to contend with rejection and a lack of understanding from all
those who wish to remain in the euro solely for the advantages it offers them,
while at the same time they violently rebel against the bitter discipline that
the European single currency imposes on all of us, and especially on the most
demagogic politicians and the most irresponsible privileged interest groups.
In any case, and as an
illustration that will understandably exasperate Keynesians and monetarists, we
must highlight the very unequal results that until now have been achieved with
American fiscal-stimulus policies and monetary "quantitative easing,"
in comparison with German supply-side policies and fiscal austerity in the
monetary environment of the euro: public deficit, in Germany, 1 percent, in the
United States, over 8.20 percent; unemployment, in Germany, 5.9 percent, in the
United States, close to 9 percent; inflation, in Germany, 2.5 percent, in the
United States, over 3.17 percent; growth, in Germany, 3 percent, in the United
States, 1.7 percent. (The figures for United Kingdom are even worse than those
for the United States.) The clash of paradigms and the contrast in results
could not be more striking.[41]
7. Conclusion:
Hayek versus Keynes
Just as with the gold standard
in its day, today a legion of people criticize and despise the euro for what is
precisely its main virtue: its capacity to discipline extravagant politicians
and pressure groups. Plainly, the euro in no way constitutes the ideal monetary
standard, which, as we saw in the first section, could only be found in the
classic gold standard, with a 100 percent reserve requirement on demand
deposits, and the abolition of the central bank. Hence, it is quite possible
that once a certain amount of time has passed and the historical memory of
recent monetary and financial events has faded, the ECB may go back to
committing the grave errors of the past, and promote and accommodate a new
bubble of credit expansion.[42] However, let us remember
that the sins of the Federal Reserve and the Bank of England have been much
worse still and that, at least in continental Europe, the euro has ended
monetary nationalism, and for the states in the monetary union, it is acting,
even if only timidly, as a "proxy" for the gold standard, by
encouraging budget rigor and reforms aimed at improving competitiveness, and by
putting a stop to the abuses of the welfare state and of political demagoguery.
In any case, we must recognize
that we stand at a historic crossroads.[43] The euro must survive if
all of Europe is to internalize and adopt as its own the traditional German
monetary stability, which in practice is the only and the essential
disciplinary framework from which, in the short and medium term, European Union
competitiveness and growth can be further stimulated. On a worldwide scale, the
survival and consolidation of the euro will permit, for the first time since
World War II, the emergence of a currency capable of effectively competing with
the monopoly of the dollar as the international reserve currency, and therefore
capable of disciplining the American ability to provoke additional systemic
financial crises that, like that of 2007, constantly endanger the world
economic order.
Just over 80 years ago, in a
historical context very similar to ours, the world was torn between maintaining
the gold standard — and with it budget austerity, labor flexibility, and free
and peaceful trade — or abandoning the gold standard, and thus everywhere
spreading monetary nationalism, inflationary policies, labor rigidity,
interventionism, "economic fascism," and trade protectionism.
Hayek, and the Austrian
theorists led by Mises, made a titanic intellectual effort to analyze, explain,
and defend the advantages of the gold standard and free trade, in opposition to
the theorists who, led by Keynes and the monetarists, opted to blow up the
monetary and fiscal foundations of the laissez-faire economy, which until then
had fueled the Industrial Revolution and the progress of civilization.[44]
On that occasion, economic
thought ended up taking a very different route from that favored by Mises and
Hayek, and we are all familiar with the economic, political, and social
consequences that followed. As a result, today, well into the 21st century,
incredibly, the world is still afflicted by financial instability, the lack of
budget rigor, and political demagoguery. For all these reasons, but mainly
because the world economy urgently needs it, on this new occasion,[45] Mises and Hayek deserve to finally
triumph, and the euro (at least provisionally, and until it is replaced once
and for all by the gold standard) deserves to survive.[46]
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Notes
[1] The main authors and
theoretical formulations can be consulted in Huerta de Soto 2012 [1998].
[2] Ibid., chapter 9.
[3] F.A. Hayek 1971 [1937].
[4] Though Hayek does not
expressly name them, he is referring to the theorists of the Chicago School,
led by Milton Friedman, who in this and other areas shake hands with the
Keynesians.
[5] Later we will see how,
with a single currency like the euro, the disciplinary role of fixed exchange
rates is taken on by the current market value of each country's sovereign and
corporate debt.
[6] To underline Mises's
argument even more clearly, I should indicate that there is no way to
justifiably attribute to the gold standard the error Churchill committed
following World War I, when he fixed the gold parity without taking into account
the serious inflation of pound sterling banknotes issued to finance the war.
This event has nothing to do with the current situation of the euro, which is
freely floating in international markets, nor with those problems that affect
countries in the eurozone's periphery and that stem from the loss in real
competitiveness suffered by their economies during the bubble (Huerta de Soto
2012 [1998], 447, 622–623 in the English edition).
[7] In Spain, different
Austrian economists, including me, had for decades been clamoring
unsuccessfully for the introduction of these (and many other) reforms that only
now have become politically feasible, and have done so suddenly, with surprising
urgency, and due to the euro. Two observations: first, the measures that
constitute a step in the right direction have been sullied by the increase in
taxes, especially on income, movable capital earnings and wealth (see the manifesto against
the tax increase that
I and 50 other academics signed in February 2012); second, the principles of
budget stability and equilibrium are a necessary, but not a sufficient,
condition for a return to the path toward a sustainable economy, since in the
event of another episode of credit expansion, only a huge surplus during the
prosperous years would make it possible, once the inevitable recession hit, to
avoid the grave problems that now affect us.
[8] For the first time, and
thanks to the euro, Greece is facing up to the challenges that its own future
poses. Though blasé monetarists and recalcitrant Keynesians do not wish to
recognize it, internal deflation is possible and does not involve any
"perverse" cycle if accompanied by major reforms to liberalize the
economy and regain competitiveness. It is true that Greece has received and is
receiving substantial aid, but it is no less true that it has the historic
responsibility to refute the predictions of all those prophets of doom who, for
different reasons, are determined to see the failure of the Greek effort so
they can retain in their models the very stale (and self-interested) hypothesis
that prices (and wages) are downwardly rigid (see also our remarks in footnote
9 about the disastrous effects of Argentina's highly praised devaluation of
2001). For the first time, the traditionally bankrupt and corrupt Greek state
has taken a drastic remedy. In two years (2010–2011) the public deficit has
dropped 8 percentage points; the salaries of public servants have been cut by
15 percent initially and another 20 percent after that, and their number has
been reduced by over 80,000 employees and the number of town councils by almost
half; the retirement age has been raised; the minimum wage has been lowered,
etc. (Vidal-Folch 2012). This "heroic" reconstruction contrasts with
the economic and social decomposition of Argentina, which took the opposite
(Keynesian and monetarist) road of monetary nationalism, devaluation, and
inflation.
[9] Therefore, fortunately,
we are "chained to the euro," to use Cabrillo's apt expression
(Cabrillo 2012). Perhaps the most hackneyed contemporary example Keynesians and
monetarists offer to illustrate the "merits" of a devaluation and of
the abandonment of a fixed rate is the case of Argentina following the bank
freeze ("corralito") that took place beginning in December of 2001.
This example is seriously erroneous for two reasons. First, at most, the bank
freeze is simply an illustration of the fact that a fractional-reserve banking
system cannot possibly function without a lender of last resort (Huerta de Soto
2012 [1998], 785–786). Second, following the highly praised devaluation,
Argentina's per capita GDP fell from 7,726 dollars in 2000 to 2,767 dollars in
2002, thus losing two-thirds of its value. This 65 percent drop in Argentinian
income and wealth should give serious pause to all those who nowadays are
clumsily and violently demonstrating, for example in Greece, to protest the
relatively much smaller sacrifices and drops in prices involved in the healthy
and inevitable internal deflation that the discipline of the euro is requiring.
Furthermore, all the patter about Argentina's "impressive" growth
rates, of over 8 percent per year beginning in 2003, should impress us very
little if at all, when we consider the very low starting point after the
devaluation, as well as the poverty, paralysis, and chaotic nature of the
Argentinian economy, where one-third of the population has ended up depending
on subsidies and government aid; the real rate of inflation exceeds 30 percent;
and scarcity, restrictions, regulations, demagoguery, the lack of reforms, and
government control (and recklessness) have become a matter of course (Gallo
2012). Along the same lines, Pierpaolo Barbieri states, "I find truly
incredible that serious commentators like economist Nouriel Roubini are
offering Argentina as a role model for Greece" (Barbieri 2012).
[10] Even
the President of the ECB, Mario Draghi, has gone so far as to expressly state
that the "continent's social model is 'gone'" (Blackstone,
Karnitschnig, and Thomson 2012).
[11] I
do not include here the analysis of my esteemed disciple and colleague Philipp
Bagus (The Tragedy of the Euro,
Ludwig von Mises Institute, Auburn, Alabama, USA 2010), because from Germany's
point of view, the manipulation to which the European Central Bank is
subjecting the euro threatens the monetary stability Germany traditionally
enjoyed with the mark. Nevertheless, his argument that the euro has fostered
irresponsible policies via a typical tragedy-of-the-commons effect seems weaker
to me, because during the bubble stage, most of the countries that are now
having problems, with the only possible exception of Greece, were sporting a
surplus in their public accounts (or were very close to one). Thus, I believe
Bagus would have been more accurate if he had titled his otherwise excellent
book The Tragedy of the European Central Bank (and not
of the euro), particularly in light of the grave errors committed by the
European Central Bank during the bubble stage, errors we will remark on in a
later section of this article (thanks to Juan Ramón Rallo for suggesting this
idea to me).
[12] The
editorial line of the defunct Spanish newspaper Público was
paradigmatic in this sense. (See also, for example, the case of Estefanía 2011,
and of his criticism of the aforementioned reform of article 135 of the Spanish
Constitution to establish the "anti-Keynesian" principle of budget
stability and equilibrium.)
[13] See,
for example, the statements of the socialist candidate for the French
presidency, for whom "the path of austerity is ineffective, deadly, and
dangerous" (Hollande 2012), or those of the far-right candidate Marine Le
Pen, who believes the French "should return to the franc and bring the
euro period to a close once and for all" (Martín Ferrand 2012).
[14] One
example among many articles is Krugman 2012; see also Stiglitz 2012.
[15] The
US public deficit has stood at between 8.2 and 10 percent over the last three
years, in sharp contrast with German deficit, which stood at only 1 percent in
2011.
[16] An
up-to-date explanation of the Austrian theory of the cycle can be found in
Huerta de Soto 2012 [1998], chapter 5.
[17] Skidelsky 2011.
[18] A
legion of economists belong to this group, and most of them (surprise,
surprise!) come from the dollar-pound area. Among others in the group, I could
mention, for example, Robert Barro (2012), Martin Feldstein (2011), and
President Barack Obama's adviser, Austan Goolsbee (2011). In Spain, though for
different reasons, I should cite such eminent economists as Pedro Schwartz,
Francisco Cabrillo, and Alberto Recarte.
[19] Mundell
1961.
[20] Block
1999, 21.
[21] See
Whyte's (2011) excellent analysis of the serious harm the depreciation of the
pound is causing in United Kingdom; and with respect to the United States, see
Laperriere 2012.
[22] Huerta de Soto 2012
[1998].
[23] "The
euro, as the currency of an economic zone that exports more than the United
States, has well-developed financial markets, and is supported by a world class
central bank, is in many aspects the obvious alternative to the dollar. While
currently it is fashionable to couch all discussions of the euro in doom and
gloom, the fact is that the euro accounts for 37 percent of all foreign
exchange market turn over. It accounts for 31 percent of all international bond
issues. It represents 28 percent of the foreign exchange reserves whose
currency composition is divulged by central banks" (Eichengreen 2011,
130).
Guy Sorman, for his part, has
commented on "the ambiguous attitude of US financial experts and actors.
They have never liked the euro, because by definition, the euro competes with
the dollar: following orders, American so-called experts explained to us that
the euro could not survive without a central economic government and a single
fiscal system" (Sorman 2011). In short, it is clear that champions of
competition between currencies should direct their efforts against the monopoly
of the dollar (for example, by supporting the euro), rather than advocate the
reintroduction of, and competition between, "little local currencies"
of minor importance (the drachma, escudo, peseta, lira, pound, franc, and even
the mark).
[24] Such
is the case with, for example, the contest held in the United Kingdom by Lord
Wolfson, the owner of Next stores. Up to now, this contest has attracted no
fewer than 650 "experts" and crackpots. Were it not for the crass and
obvious hypocrisy involved in such initiatives, which are always held outside
the euro area (and especially in the Anglo-Saxon world, by those who fear,
hate, or scorn the euro), we should commend the great effort and interest shown
in the fate of a currency which, after all, is not their own.
[25] It
might be worth noting that the author of these lines is a "Eurosceptic"
who maintains that the function of the European Union should be limited exclusively to guaranteeing the free circulation
of people, capital, and goods in the context of a single currency (if possible
the gold standard).
[26] I
have already mentioned, for instance, the recent legislative changes that have
delayed the retirement age to 67 (and even indexed it with respect to future
trends in life expectancy), changes already introduced or on the way in
Germany, Italy, Spain, Portugal, and Greece. I could also cite the
establishment of a "copayment" and increasing areas of privatization
in connection with healthcare. These are small steps in the right direction,
which, because of their high political cost, would not have been taken without
the euro. They also contrast with the opposite trend indicated by Barack
Obama's healthcare reform, and with the obvious resistance to change when it
comes to tackling the inevitable reform of the British National Health Service.
[27] O'Caithnia
2011.
[28] Booth
2011.
[29] See,
for example, "United States' Economy: Over-regulated America: The home of
laissez-faire is being suffocated by excessive and badly written
regulation," The Economist, February 18, 2012,
p. 8, and the examples there cited.
[30] Huerta de Soto 2003
and 2009.
[31] On
the hysterical support for the grandiose fiscal-stimulus packages of this
period, see Fernando Ulrich 2011.
[32] Krugman
2012, Stiglitz 2012.
[33] Specifically,
the average rise in M3 in the eurozone from 2000 to 2011 exceeded 6.3 percent,
and we should highlight the increases that occurred during the bubble years
2005 (from 7 percent to 8 percent), 2006 (from 8 percent to 10 percent), and
2007 (from 10 percent to 12 percent). The above data show that, as has already
been indicated, the goal of a zero deficit, though commendable, is merely a
necessary, though not a sufficient, condition for stability: during the expansionary
phase of a cycle induced by credit expansion, public-spending commitments may
be made based on the false tranquility that surpluses generate; yet later, when
the inevitable recession hits, these commitments are completely unsustainable.
This demonstrates that the objective of a zero deficit also requires an economy
that is not subject to the ups and downs of credit expansion, or at least that
the budgets be closed out with much larger surpluses during the expansionary
years.
[34] Therefore,
Greece would be the only case to which we could apply the
tragedy-of-the-commons argument Bagus (2010) develops concerning the euro. In
light of the reasoning I have presented in the text, and as I have already
mentioned, I believe a more apt title for Bagus's remarkable book, The Tragedy of the Euro, would have been The Tragedy of the European Central Bank.
[35] The
surpluses in Spain were as follows: 0.96 percent, 2.02 percent, and 1.90
percent in 2005, 2006, and 2007 respectively. Those of Ireland were 0.42
percent, 1.40 percent, 1.64 percent, 2.90 percent, and 0.67 percent in 2003,
2004, 2005, 2006, and 2007 respectively.
[36] The
author of these lines could be cited as an exception (Huerta de Soto 2012
[1998], xxxvii).
[37] Ibid.
[38] At
this time (2011–2012), the Federal Reserve is directly purchasing at least 40
percent of the newly issued American public debt. A similar statement can be
made regarding the Bank of England, which is the direct holder of 25 percent of
all the sovereign public debt of the United Kingdom. In comparison with these
figures, the (direct and indirect) monetization carried out by the European
Central Bank seems like innocent "child's play."
[39] Luskin
and Roche Kelly have even referred to "Europe's Supply-Side
Revolution" (Luskin and Roche Kelly 2012). Also highly significant is
"A Plan for Growth in Europe," which was urged February 20, 2012, by
the leaders of 12 countries in the European Union (including Italy, Spain, the
Netherlands, Finland, Ireland, and Poland), a plan that comprises only
supply-side policies and does not mention any fiscal-stimulus measure. There is
also the manifesto "Initiative for a Free and Prospering Europe"
(IFPE) signed in Bratislava in January 2012 by, among others, the author of
these lines. In short, a change of models seems a priority in countries that,
like Spain, must move from a speculative, "hot" economy based on
credit expansion to a "cold" economy based on competitiveness.
Indeed, as soon as prices decline ("internal deflation") and the
structure of relative prices is readjusted in an environment of economic
liberalization and structural reforms, numerous opportunities for
entrepreneurial profit will arise in sustainable investments, which in a
monetary area as extensive as the euro area are sure to attract financing. This
is how to bring about the necessary rehabilitation and ensure the longed-for
recovery in our economies, a recovery that again should be cold, sustainable,
and based on competitiveness.
[40] In
this context, and as I explained in the section devoted to the "Motley
Anti-euro Coalition," we should not be surprised by the statements of the
candidates to the French presidency, which are mentioned in footnote 13.
[41] Estimated
data as of December 31, 2011.
[42] Elsewhere
I have mentioned the incremental reforms that, like the radical separation
between commercial and investment banking (as in the Glass-Steagall Act), could
improve the euro somewhat. At the same time, it is in United Kingdom where,
paradoxically (or not, in light of the devastating social damage that has
resulted from its banking crisis), my proposals have aroused the most interest,
to the point that a bill was even presented in the British Parliament to
complete Peel's Bank Charter Act of 1844 (curiously, still in effect) by
extending the 100 percent reserve requirement to demand deposits. The consensus
reached there to separate commercial and investment banking should be
considered a (very small) step in the right direction (Huerta de Soto 2010 and
2011).
[43] My
uncle by marriage, the entrepreneur Javier Vidal Sario from Navarre, who
remains perfectly lucid and active at the age of 93, assures me that in all his
life he had never, not even during the years of the Stabilization Plan of 1959,
witnessed in Spain a collective effort at institutional and budget discipline
and economic rehabilitation comparable to the current one. Also historically
significant is the fact that this effort is not taking place in just one
country (for example, Spain), nor in relation to one local currency (for
example, the old peseta), but rather is spread throughout all of Europe, and is
being made by hundreds of millions of people in the framework of a common
monetary unit (the euro).
[44] As
early as 1924, the great American economist Benjamin M. Anderson wrote the
following:
Economical living, prudent financial policy, debt
reduction rather than debt creation — all these things are imperative if Europe
is to be restored. And all these are consistent with a greatly improved
standard of living in Europe, if real activity be set going once more. The gold
standard, together with natural discount and interest rates, can supply the
most solid possible foundation for such a course of events in Europe.
Clearly, once again, history
is repeating itself (Anderson 1924). I am grateful to my colleague Antonio
Zanella for having called my attention to this excerpt.
[45] Moreover,
this historic situation is now being revisited in all its severity on China,
the economy of which is at this time on the brink of expansionary and
inflationary collapse. See "Keynes versus Hayek in China," The Economist, December 30, 2011.
[46] As
we have already seen, Mises, the great defender of the gold standard and 100
percent–reserve free banking, in the 1960s collided head-on with theorists who,
led by Friedman, supported flexible exchange rates. Mises decried the behavior
of his disciple Machlup, when the latter abandoned the defense of fixed
exchange rates. Now, 50 years later and on account of the euro, history is also
repeating itself. On that occasion, the advocates of monetary nationalism and
exchange-rate instability won, with consequences we are all familiar with. This
time around let us hope that the lesson has been learned and that Mises's views
will prevail. The
world needs it and he deserves it.
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