Merlin

1. Better than nothing?

1.1 Few of those interested in economics can afford to show no interest at all in the Euro experiment, undoubtedly the most salient monetary development of the last decade (not of the current one, though), for better or worse. To libertarians, the question of interest is such: was the adoption of the Euro an improvement over the previous situation of a multitude of national fiat currencies, or a regression to a less desirable state of affairs?

1.2 I will try to provide my answer by availing myself of the local perspective of a citizen with, as it were, a first-row seat to the Euroshow. For prior discussions of the Euro on this humble blog, see here and here.

2. Arguments for

2.1 The most concise libertarian voice in defense of the euro has been that of Prof. Jesus Huerta de Soto, in whose An Austrian Defense of the Euro one finds the theme that, for all its faults, the Euro is a step forward toward a proper monetary system.

2.2 De Soto argues that the adoption of the Euro has deprived the governments of the Eurozone of the absolute power over monetary affairs, preventing them from too heavily abusing this monopoly to finance their unquenchable thirst for power. Is it, after all, such an unexpected occurrence that the first Welfare State Crises of this century precipitated after the adoption of the Euro?

2.3 If one adds that the Euro has both weakened the link to the printing press and instituted a single super-national monetary standard in a huge economic area, one may start to agree with Prof. De Soto’s argument of the Euro being a timid reinstatement of some good old Gold Standard discipline in the Eurozone (though not everyone agrees to the analogy).

2.4 If the argument appears sound it is because it is so, at least as far as it goes, and at least for the time being. It can hardly be doubted that, hadn’t it been for its weakened ability to print its way out of debt, the, let us say, Greek government wouldn’t have faced such a massive and paralyzing fiscal crisis. To the degree that a few core members insist on keeping inflation in check (in relative terms, that is), the Eurozone has provided most of its members with a far sounder currency, inadvertently bringing the welfare party to a sudden crash.

2.5 An extreme instance of this salutary effect can be witnessed in the ‘informal’ Eurozone, i.e. in those countries which use the Euro but are nevertheless not part of the profit-sharing arrangement that is the European Central Bank (ECB). Leaving aside micro-nations, these countries include Kosovo and Montenegro.

2.6 Speaking of the former, where I can claim personal experience, I can say that the adoption of an ‘outside’ currency as legal tender has left the government in Prishtina in the same position of a typical XIX Century government. Unable to finance its adventures with fiat money production, Kosovo might as well be on the Gold Standard as far as its government is concerned.

2.7 As no one in his right mind would lend to a government in such a difficult situation, the level of ‘public’ debt is minuscule and the innumerable aggressions against civil society have failed to manifest in Kosovo, much to the chagrin of the general statist mindset (but let the nations who are without sin cast the first stone). Whatever other innumerable problems the country faces in its development, aggressive statist expansion is not among them.

2.8 Of course, Eurozone members do not find themselves in such extreme circumstances. They do, after all, profit form money creation, and the issue it merely to come to an agreement on the rate of inflation (creating a sort of tragedy of the commons in the process). Still, to the degree that this need for a consensus has cooled statist appetites in most countries, the Euro can indeed be seen as an improvement for most countries.

3. Arguments against

3.1 Of the many arguments thrown against the Euro, but a precious few will make any impression on followers of the Austrian Tradition. Indeed, most of such arguments can be restated as: “the Euro forced us to control our immediate thirst for state action”.

3.2 Still, leaving aside the debate on “Optimal Monetary Areas” (which will anyway leave at least the Rothbardians disinterested), the Euro still fails our “relative improvement” requirement by one crucial criterion: it cripples currency competition within the Eurozone. To illustrate, let us once again make use of our local vantage point.

3.3 Despite Albania not being part of the informal Eurozone, and the local currency (the Lek) not being pegged to the Euro, a daily monetary battle still rages on chez nous. The Euro is routinely used for all transactions above a certain value, as for all real estate deals, and some business and labor contracts. My country is, for all intents and purposes, on a double Lek-Euro standard.

3.4 The salutary effects of this setup can be easily gauged. Facing a limited and volatile demand for Leks, the Bank of Albania cannot afford to inflate the local currency beyond reason, completely obliterating the demand for Leks for anything beyond the necessary tax transactions. Faced with such constraints, the Lek has been treated rather more decently than one would expect from a poor country with a decidedly statist general opinion. But again, I see no stones flying.

3.5 Would the monetary picture in Albania change for the best with the ascension to the Eurozone (for which, in strictly Maastricht terms, it would qualify)? Certainly not. Even agreeing to the Euro being the sounder currency in the country, what good would the elimination of the local alternative do? In the best case scenario, it would leave the citizens (already heavily using Euros) indifferent, while granting the BoA (which would become part-owner of the ECB) a far larger share of profits from the monetary base in the country. In the worst case scenario, it would allow the newly monopolistic ECB to inflate the Euro far more aggressively than the local BoA would ever have.

3.6 If we up the scales a bit, and transfer this analysis to the Eurozone, we will see that the sovereign Euro is today in a far better position to inflate than any of the former local currencies. EU citizens could and did avail themselves of other EU currencies for investment and saving purposes, thus creating a proto-free monetary zone. With the arrival of the Euro, the scope of such activities has been greatly reduced. Although a massive internal flow of capital away from the ‘periphery’ and into the ‘heartland’ continues to this day, this sort of competition concerns individual banks rather than Central Banks.

3.7 It is true that the Euro today is much sounder than all but a few of the local currencies it displaced, but the incentive to abuse the awesome monopolistic power conferred by the 300 Million+ Eurozone will shortly corrode the will of a few countries to resist the tide. Wasn’t, after all, the US dollar much stronger than almost all other currencies upon the establishment of the Breton Woods system? Still the quasi-monopolistic status that the system conferred was incentive enough to greatly dilute its purchasing power, even relatively to other currencies. Why on earth would one expect the Euro to fare any better?

4. An alternative

4.1 When weighting these two considerations, I would confidently agree that the establishment of the Euro has been a net loss for European citizens. The short-term gains brought by the adoption of a single, relatively strong currency in such a wide area will be gradually overturned by the perverse incentives of the ECB to abuse its monopolistic power of issue. In a decade, all Europeans shall find themselves Italians using a Lira-strength currency, not Germans using some surrogate Deutschmark.

4.2 The road taken towards the noble goal of monetary integration is analogous (though of course uncorrelated) with a wider mental habit in the greater sound money community. The idea, if not the precise implementation, of the Eurozone is indeed a proto-golden one. Many freedom lovers do, in fact, insist on the outright establishment of some variation of a Gold Standard, here stopping their analysis. The euro is but a real politik variation of such schemes, whereas a single, supposedly strong currency displaces the former patchwork of depreciating local currencies.

4.3 The alternative has been proposed by F.A. Hayek in his Denationalization of Money, at a time when the Euro was but a project. Let us hear,

[…]the countries of the Common [European] Market, preferably with the neutral countries of Europe (and possibly later the countries of North America) mutually bind themselves by formal treaty not to place any obstacles in the way of the free dealing throughout their territories in one another’s currencies (including gold coins) or of a similar free exercise of the banking business by any institution legally established in any of their territories.

(F.A.Hayek, p.23, Denationalization of Money: The Argument Refined,

Third Edition, Institute of Economic Affairs, 1990)

4.4 Hayek advised the European Governments interested in the Euro project to create in its stead a common monetary area in the form of mutually-inclusive Legal Tender laws. The Franc in France should have been treated no better than the Mark, for all legal purposes apart from taxation. Once such a common monetary area had been established, the various Central Banks would have gained an incentive to behave lest the demand for their currency should suffer. Incredible as it may sound, the British government actually supported just such an idea prior to the refusal of the Euro. Of course, the Continent would not hear of it.

4.5 This system ­– a real politik variation of the insight that Legal Tender laws, and not necessarily fiat money per se are the central point of the monetary quagmire ­– would have brought all the benefits of the Eurozone with none of its handicaps. Greeks, Italians and Spaniards would still have preferred to do business and save in German Marks, in time eroding the demand for their national currencies. Had these currencies been left unreformed, their market share would have gradually dropped to the minuscule amounts necessary to clear one’s debts with the taxman. Public sector employees would have found the purchasing power of their, let us say, Franc-denominated wages to constantly fall, and the holders of Drachma-denominated bonds would have found their returns to mean little in the new Common Monetary Area.

4.6 Instead of suddenly coming to a massive crisis, the public sector would have found itself gradually losing its power. Job prospects would no longer entice, public pensions and welfare would appear meek and government debt would be worth exactly what it deserved. Is short, a gradual cleaning of the house, as opposed to the single-shot crisis one witnesses these days. The Eurozone does indeed appear a poor substitute in respect.

4.7 It is not late to implement such a vision. A larger Common Monetary Area could yet be created between the Eurozone, the handful of Western European countries not on the Euro, integrated and non-integrated Eastern Europe and, why not, even section of the Middle East and North Africa . This would in itself be a much better solution than the calls for individual Eurozone members to ‘secede’ and regain their national currencies. Still, if any current Eurozone member insists of such a path, let the ECB insist in turn on the “seceding” country retaining the free use of Euros on its territory.

4.8 With all its short-term benefits and its longer-term faults, the Euro project can still be meaningfully compared to the Gold Standard. To the degree that the calls for the immediate and even global return to gold eclipse the truly central issue of Legal Tender laws, a theoretical global gold-ish standard will only leave the unavoidable managing authority with the unlimited power to renege on any convertibility promises it may issue to sell such a global monopoly. If the US reneged on convertibility promises in 1971 after having gained a cozy quasi-monopolistic position for the Dollar, and if the ECB is already barely resisting calls for much more ‘aggressive’ expansion, it should be clear that any monetary project that does not make monetary competition its paramount aim is doomed to deliver inflation, if with the silver lining of the occasional momentary improvement.