The Euro Currency Vs. The Eurozone
June 24, 2011
(This item originally appeared at forbes.com on June 24, 2011.)
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.