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
the productive 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
[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).
[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.
[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.
[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.
[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.
[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.
[31] On the hysterical support for the grandiose fiscal-stimulus packages
of this period, see Fernando Ulrich 2011.
[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.
[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.
[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).
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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