What of the euro?

I recently spent a very enjoyable 5 days travelling around the Low Countries of Northern Europe with a friend of mine. We drove through abandoned border posts, and used one currency across 5 borders – quite amazing! Our language skills were not always up to the challenge, but we got by. Conversation naturally turned to how the region had changed as a result of the EU and the euro.

He’s blogged some of his ideas from the holiday at his blog Questioning and Answering and also in a follow up post. I won’t look at pro/anti EU arguments, but rather focus on the euro, which is very relevant to the theme of this blog.


Two beautiful old churches in Maastricht, home of the 1992 treaty that established the euro

The euro has significant benefits – economically speaking, the primary benefit is that of reduced transaction costs across borders. Rather than swapping your Francs for Marks, you can pay your neighbour in euros. This helps to increase trade between nations, to the benefit of all in the eurozone. The other key benefit (stemming originally from free trade, but encouraged by the adoption of the euro) is peace. As Frederick Bastiat of broken window fame once said,

“When goods do not cross borders, soldiers will.”

But the euro suffers from the same problem as the pound, the dollar, the yen – in fact any other fiat currency. And the European Central Bank (ECB) has the same flaws as the Bank of England or the Fed. The central bank is able to increase the money supply without any limit, and can set interest rates outside of the market price. I discussed in an earlier piece why this is harmful, but I’d like to quote the Cobden Centre’s Sean Corrigan  on this:

Even without that, this fixation with reducing long rates is a futile one. No less than 320 years ago, Sir Dudley North already knew better than Ben Bernanke that to assume that low interest rates are a cause, rather than an effect, of prosperity is to put the cart very much before the horse.

In his 1691 ‘Discourses Upon Trade’, he argued that:-

These things consider’d, it will be found, that as plenty makes cheapness in other things, as Corn, Wool, etc. when they come to Market in greater Quantities than there are Buyers to deal for, the Price will fall; so if there be more Lenders than Borrowers, Interest will also fall; wherefore it is not low Interest makes Trade, but Trade increasing, the Stock of the Nation makes Interest low.

It is said, that in Holland Interest is lower than in England. I answer, It is; because their Stock is greater than ours. I cannot hear that they ever made a law to restrain [it]…

To have a central bank decide interest rates is effectively to ignore reality and to artificially agree on a price for borrowing money – rather than relying upon the actual amount of loanable funds that are available from savings. The euro zone gives us a very helpful picture of the dangers of this. Two nations on the “periphery”, Ireland and Spain, had very significant housing booms, followed by massive busts. France and Germany’s housing sector was less volatile. Why was this? Simply that these economies are not the same – France and Germany have a greater proportion renting than buying homes, and so the lower interest rates did not set off such a large house bubble.  Centrally set interest rates take no account of the highly heterogenous nature of the European economy. Similar effects were seen in the US – again a highly diverse economy.

So what would I propose? Well, ending the ECB would be a start, but returning to national fiat currencies is hardly much of an improvement. Each currency would still be subject to inflation, as is always the case with fiat currencies, and the same boom-bust process would take place, just as it did in the US and UK with national central banks. Even the Bundesbank, often praised for it’s (relatively) sound money policies, still suffers from the same knowledge problem as any central bank. Prices on the market are not something we can “know” and then set by fiat day by day. Instead, they are formed by consumers, traders, investors, and others, buying and selling, making exchanges. Likewise, the market interest rate would be set in the same way.

The solution then is neither a European wide single currency, nor national currencies, but rather the complete denationalisation of money, and allowing the market to provide money. Back in the days of the gold standard, European nations fixed their currencies as a certain weight of gold. Trading was then easy – you just paid your neighbours in gold – you didn’t need to exchange a pound for a franc. A pound or franc was just the name for a certain weight of gold. There were fixed exchange rates and no need for a bureau de change! Governments abandoned this standard in order to pay for the carnage of the First World War, so rather than trusting governments to maintain such a standard, it’s best to get government out of the way altogether.

In Britain, we tend to have a adverse reaction to the Euro, as many of see joining it as a surrender of our sovereignty (which is quite true, as Greece is now finding out). But the motivations of the euro-creators are really quite irrelevant. If the Bank of England can’t set interest rates appropriately for a country of 60 million, what hope is there that the ECB can get it right for 300 million? The euro is simply another fiat currency – the only question is whether the dollar or euro will fall first – both are in serious crisis, and both stem from the same underlying causes.

For further reading, I recommend Philip Bagus’ Tragedy of the Euro, available for free from the Mises Institute.

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4 Responses to What of the euro?

  1. Interesting: I suppose the question for me that from an economic point of view this might work but I cannot get my mind around the practicalities. Are you suggesting a single rate for gold accross the former Euro countries? How do you reinstate gold as currency? More importantly for me, it asks the question how important is economic union to the implementation political/cultural union (answers and a blog post to follow).

  2. andyfrith2 says:

    Hi Christopher,

    Each country could choose their own rate – but in the manner of a franc being one ounce, a deutschmark being two ounces or whatever. They could also be the same rate, you could have a “gold euro” where the euro is defined as a certain weight of gold. Such proposals would be similar to the classical gold standard of the late 1800s, so we’ve done it before.

    What used to happen is that the central bank would hold gold reserves that anyone holding the currency could hold claim to. So if a pound is one ounce of gold, I can go to the BoE and get a physical ounce of gold in return. This is one of the key ways it acts as a brake on inflation. Western countries abandoned this gold standard at varying times in the 20s/30s, and after WWII a new pseudo-gold standard (Bretton Woods) was introduced whereby only central banks could claim the gold backing the US dollar. This was then ended by Nixon in 1971.

    In our current climate, a return to any of these systems would reduce inflation and help to prevent future sovereign debt crises.

    To return to these, all that is needed is for a the BoE to say that £1 equals a given weight of gold, (or equivalently that 1 ounce of gold equals a certain number of pounds) and that holders of pounds can claim said gold. Other central banks could make similar guarantees.

    As I’ve tried to show in this blog, we can’t trust the government with such things, so the goal would be to move over time from such a gold standard to fully market-based money. History shows us that people have tended to choose gold and silver as money, so that would likely be the dominant choice. With market based money, there would be no national currencies, and individuals could use the currency of their choice. Ending legal tender laws would be necessary to do this.

    There’s a useful article (http://mises.org/daily/5492) by Robert Murphy explaining this (for the US) far better than I can, and answering some of the difficulties present in doing so.


  3. Torn Halves says:

    Andy, I think I understand your argument a bit better now. At least I have a clearer idea of what you are arguing for. Some details of the problem with fiat currencies are still lost on me (perhaps you explain that on the video, but we can’t see that over here). However, what interests me more than the details of the economic argument is the political basis of your position – this insistence that the government is never to be trusted. You have great trust in markets – in the masses and the corporations – in the people. My feeling is that in the absence of martial law, if a people cannot establish a government that can be trusted, then the people can also not be trusted.

    Some of us would want to argue for things like a right to work and a right to shelter and perhaps a basic standard of living (although those tea party Republicans who recently cheered the idea of leaving the uninsured ill to die will vehemently disagree). Rights are not possible without the state. The problem, though, is that a better state will only be possible if people improve and demand it and continually take an interest in it, and care about it and call it to account. The stumbling block, from this point of view, is the people, not the government. The government could be overthrown in a matter of hours, but overthrowing the people is much, much trickier.

    I know that if I refer to the -ism word that begins with the adjective “social” it will be a red rag to a bull, but Einstein wrote a very interesting essay some time back (1949). Let me just quote a snippet:

    “I have now reached the point where I may indicate briefly what to me constitutes the essence of the crisis of our time. It concerns the relationship of the individual to society. The individual has become more conscious than ever of his dependence upon society. But he does not experience this dependence as a positive asset, as an organic tie, as a protective force, but rather as a threat to his natural rights, or even to his economic existence.”

    When you refer to the government could we replace that term with the word “society”? Is there some antipathy here to the very idea of society (not just to the government)?

    • andyfrith2 says:

      In any society, the government is made up of some people from that society. Therefore, if we don’t trust individuals, how can we trust the government? Unless we assume the government is made up of the best, brightest, and most caring in society, why should we trust the government more than the man running the local fish and chip shop? My main beef with governments is that they operate solely through the use of force. We are taught as children that violence is wrong, and yet as adults we are told to obey the government which uses coercion every day. If governments are necessary, they must be strictly limited so as to not abuse this legal monopoly they hold on the use of force.

      The government is not society, but the institution that rules over society. I have no antipathy whatsoever to society – in a free market, as much as in any other system, we all depend on each other. I cannot build a car, that’s why a buy one. We all serve one another through our varied skills, that we can trade and use to each other’s benefit. Especially in a modern economy, we cannot be independent, we are interdependent. But the government is not the same thing – it seeks to use force to appropriate my property, to determine what I can do with my body and my time and even in the least corrupt nations, to enrich itself and its allies at the expense of others. Society is about voluntary exchange, sharing of ideas and helping one another. Einstein is right if by society he means the voluntary cooperation of many individuals, but there is no question that government does pose “a threat to his natural rights, or even to his economic existence”.

      Thanks for discussing these things by the way!

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