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Europe
sure is a mess these days. On the one hand, we have profligate governments that have exceeded their credit limits. On the other, taxpayers of Germany, France, Ireland and elsewhere are being stuffed with the losses that would
have been rightly borne by the bankers.
In the process of being forced to eat the bankers' losses, which naturally they don't want
to do, governments are being
strong-armed in a dozen different ways, undermining democratic processes and threatening to turn the whole continent into a concentration camp of financial
exploitation.
What does this have to do with the
euro--the currency itself?
Almost nothing. The euro is just a
counting-unit. It turns
out that there are a lot
of advantages when people
use the same counting-unit,
rather than dozens of independent ones. Although the European Central Bank's handling of the euro could be rightly criticized,
none of the headline problems today
have been caused by the euro itself.
Strange as it may seem, all of this superstructure of centralized
government that has accompanied the euro currency is unnecessary. Today, people claim that the success of the euro depends on further centralization of state
power in Brussels, and "fiscal integration,"
but this is baloney. These people are simply making up excuses why political power should be further
concentrated, usually because they are direct beneficiaries of this
concentration.
A currency is a very simple thing. It is a counting-unit
for transactions. It has basically one characteristic, its value. The
value goes up or it goes down, or perhaps, it is stable, going sideways if you will. That's
pretty much the whole thing.
Whether we have
"fiscal integration" or not, whether a debtor defaults or
not, whether taxes are high
or low, deficits large or
small, unemployment swelling or shrinking, the currency only goes up, down, or remains
stable.
What if, for example, there was no centralized bureaucracy or integration at all in Europe? Governments could adopt or abandon the euro as they
pleased. The outcome would be basically
the same. It would work fine, assuming the euro itself was properly
managed.
Ecuador, for example,
uses the U.S. dollar exclusively. It is "dollarized." Oddly enough, Ecuador's government also defaulted on its debt in
2008. President Rafael Correa,
an economist educated in Belgium and the United States, declared
the debt illegitimate, as
it was contracted by corrupt and despotic prior regimes.
This turned out to be rather popular among Ecuadorians: Correa was re-elected
in 2009, the first time since
1979 that a candidate was
elected in the first round of voting.
After the default, Ecuador
continued to use the dollar as its
sole currency. We have
the idea that a government that
defaults must also cease using the common currency. Why? There is no reason.
Thousands of homeowners
are defaulting on their mortgages every day. Do they need a new currency too?
The idea is even promoted that Greece's government, for example, should issue its own currency for the express purpose of devaluing it. This would seem like a rather
unpopular currency. I
assume that all Greek debts now denominated
in euros would then be re-denominated in the new drachmas. Changing the currency of denomination unilaterally is a default plain
and simple. However, it would be a default not only of one borrower, the
central government, but all Greek
borrowers, including
corporations, homeowners, municipal governments and so forth.
Talk about making the problem
worse!
Let's assume, instead, that existing euro-denominated debts in Greece would not be re-denominated in a new currency. They would still have to be paid in euros. However, Greece would adopt a new drachma which would immediately fall perhaps 50% against the euro.
Imagine you have a mortgage,
or perhaps a small
business loan. Your salary and revenues are now denominated in drachmas, devalued 50%, but your debts remain in euros. The burden of the euro debt would effectively double, and vast swathes of private borrowers would default.
Some countries also use
the euro as their sole currency,
without being part of the
eurozone and all of the overbearing
centralized control that comes with that.
It works fine.
What if not one, but all the governments
of Europe defaulted on their
debt? The euro would go
up, or down, or it would remain stable, just as it always does.
Ideally, it would remain stable. While some might
fear that the value of
the euro could decline in
such a scenario, in fact
the ECB could easily
support the euro's value by reducing
its supply.
When I follow the
discussions regarding Europe, I find
four basic themes:
--Fear that a series of sovereign defaults would lead to a collapse in euro value, basically due to the incompetence
of the ECB in reacting improperly
to this decline in value.
--Desire among certain elites for a bureaucratic superstate unanswerable to democratic processes. The present situation is being grasped at as a justification for this superstate, which is wholly unnecessary.
--Desire by the bankers
to stuff taxpayers with their losses.
The bankers have teamed
up with the superstaters,
because it has become quite obvious that voters have no interest in paying for the banks' losses. An unelected superstate is a fine tool to extort the population.
--Keynesian hacks who still believe that a currency devaluation is an all-purpose crisis-management tool, without ever having thought
through the consequences.
A currency is supposed to be a neutral agent of commerce. Ideally,
it remains stable in
value. In the past, this always meant: pegged to gold. All of the centralized
bureaucracy and fiscal coordination of the eurozone is unnecessary.
In the past, Europe's
"single currency" was
gold. Countries had their
own paper money, but it was all linked
to gold at fixed rates. Naturally, this meant that currencies
remained at fixed rates with each other as well. The effect was much the same as if they had all used the same paper currency.
Governments retained full
sovereignty. There was no
Brussels-based superstate,
"fiscal integration," or other nonsense. Often, governments defaulted. It was quite common,
actually, but business continued
and currencies remained linked to gold.
Maybe that was a good system? The Europeans
themselves thought so.
Nathan Lewis
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