Euro Crisis from Long Perspective

Free trade and markets matter much more than the euro

by Chidem Kurdas

The European crisis, in progress for years and still showing no sign of resolution, is largely the result of elite hubris. To create the euro and ram it down the throats of populations that, left to their druthers, would have stayed with their old currencies—this was a massive, top-down social engineering project.

There is no end to the harm done by the mindset that Hayek called constructivist rationalism—the delusion that smart aleck  bureaucrats and politicians can redesign societies from scratch like engineers constructing a machine from a blueprint. The lure of social engineering to government elites is such that even the dramatic collapse of communism has not been enough to drive home the Hayekian lesson of humility.

Creating the euro was a different level of ambition from building a common European market. The latter had historical roots. There had been free flow of goods, capital and people across parts of Europe in the 19^th century and earlier. Political barriers and wars disrupted those flows, but at times and in places free trade and free migration across national borders was a reality. Indeed, by mid-20^thcentury older people remembered with nostalgia how easy travel had once been.

Hence by removing the barriers to the movement of goods, money and people, the European Union was not imposing a novel blueprint.  Had it stopped with free markets, tremendous economic and political benefits would have been achieved with little downside. I have to admit that I never understood the aggressive drive to impose a common currency.

The United States is sometimes mentioned as a model. That’s misleading. The thirteen original American states were all colonies of the same empire, held broadly similar political views and used the same currencies. The Constitution was not dreamt up in a vacuum but was based on values and beliefs that went back centuries.

Hayek defined the proper function of government as  “to find justice, not to create it.” That is, governments should not invent rules out of whole cloth but recognize, codify and enforce the rules that have evolved over time, work well and are accepted by the population.

Thus the American colonists were inclined to constitutionalism long before they  turned to the making of a formal national constitution. In Massachusetts Bay Colony, concern that the magistrates might have too much discretion led to the proposed remedy “that some men should be appointed to frame a body of grounds of laws, in resemblance to a Magna Charta, which … should be received for fundamental laws.” That was in 1635.

The historian Daniel Boorstin, who gives the quote in The Americans: The Colonial Experience, pointed out that Americans modeled their political arrangements on ancient institutions familiar from the mother country. They knew that these protected liberties in England. Each colony drew a similar constitution. So the national constitution, when it came, had a familiar ring to it.

By contrast, ambitious politicians and Eurocrats invented the euro just like they invent endless rules that throttle local economies. We are witnessing the results.

Attempts to preserve the monetary union as constituted, for instance by flooding banks with liquidity, are becoming ever more costly and dangerous. Greece, Portugal, Spain, Italy—they can’t all be stabilized. Had the original currencies been in place, the market mechanism would have brought about adjustments.  In its absence, there will have to be triage, a decision who to bail out and for how long. Germany, the main source of funds, will probably be forced to pick and choose.

Amidst this painful process, what needs to be kept in mind is that free trade and markets matter much more than the euro. Preserving them should be the priority.