These are my thoughts on reading An Austrian Defense of the Euro by the esteemed Jesús Huerta de Soto, professor of economics at Universidad Rey Juan Carlos.
Proponents of sound money should readily agree that to the extent that the euro is presently a “hard” currency, it can be considered superior to a collection of “soft” national currencies. However, there is at least one tangible benefit for some when national governments control their own currencies: users of money, fearing inflation, can frequently escape from a depreciating currency by switching into one of its more stable foreign counterparts. A floating exchange rate régime complements this system by efficiently reflecting the depreciation of the softer currency in the price and thereby illustrating the relative loss of purchasing power.
The euro abolished these dynamics, preventing escape through exiting the monetary system of just a single nation and requiring instead financial migration from a large supranational bloc.
But is it not true that a fixed exchange rate régime imposes discipline on governments, whereas a floating exchange rate régime allows for profligacy and a race to the bottom? Yes, this is true, so long as the fixed exchange rate in question has been imposed on the producers of money, and not imposed on the users of money. For example, suppose that Central Bank A pledges that one unit of their currency, alpha, shall be worth exactly one unit of Central Bank B’s currency, beta, and succeeds in buying and selling alphas and betas in the marketplace to enforce this rate. The fixed exchange rate should indeed help to impose some discipline on the government which owns Central Bank A. Central Bank A will be incentivised not to inflate the supply of alphas any more than B inflates the supply of betas; if they inflate too much, they will pay the price for it by the requirement to supply extra betas into the marketplace (a currency unit which they cannot create without cost) in order to maintain the fixed rate. This is the mechanism by which fixed exchange rates can help to produce monetary and hence fiscal discipline.
Does the euro impose a fixed exchange rate? Yes, it does. However, it imposes the fixed rate on the people, not on the central bank . The ECB is not required to guarantee the exchange rate of the euro against any other currency. Furthermore, and in particular, the citizens of Spain are not guaranteed that their currency will be maintained at a particular rate against the currency of Italy.
What has happened in reality is that the exchange rate between Spain and Italy has been obliterated. To demonstrate the point: suppose there are two bakers in your town, producing equally desirable bread. Suppose one of them makes a solemn promise that his bread will never cost more than his rival’s. This is fine, so long as he and his rival are genuinely competing to make a profit out of the business of providing you with their bread. But suppose your baker and his rival undergo a corporate merger, and a single entity now owns and completely controls both bakeries. And suppose your baker continues to promise that his bread will not cost more than the other guy’s. What would you make of his promise now? You would laugh at it. He is in a combination. The same entity dictates prices in both bakeries, and therefore the guarantee is worthless. You now have to pay the price dictated to you by the parent company, no matter which baker you go to. In like manner, the promise that one euro in Spain can be exchanged for one euro in Italy is something which carries no guarantee of value to users of the euro.
Many national governments, having been relegated to mere users rather than sovereign producers of money, have experienced great discomfort due to their inability to print their way out of recent difficulties. But the price for fiscal disclipline, in the present, on a national level, is fiscal indiscipline, in the future, on a supranational level.
The euro is a money monopoly, and a monopoly not over one nation (as most currencies are), but over many nations. The institution of the euro represents a grand weakening in the global competition to provide a reliable medium of exchange. This competition was not too strong to begin with, since almost every country holds a money monopoly over its territory, but the momentous consequence of the single currency is that eurozone countries no longer compete against each other to provide an attractive, stable money. Absent any threat of capital flight within the eurozone from nations with poor monetary policies to nations with sensible monetary policies, the ECB has the freedom to produce a form of money less satisfactory to the consumer than that which Europeans on average would otherwise have experienced. We can trust that sooner or later, if they have not done so already, they will choose to exercise this power. As a consequence of this, the EU will be relatively free to follow fiscal policies less restrained than those which Europeans on average would have witnessed. The errors of the nation are replaced by the errors of the bloc.
The route to sound money, whether that may be gold or silver or something else, with 100% or fractional reserves, must require increased levels of competition among producers of money, not decreased levels of competition. Few of us would argue that decreased competition would improve the quality of any other good.
After the grandest of economic failures in recent years, some Irish people are now wondering about a possible escape from the Eurozone. One of the ideas, floated by David McWilliams, is that the country switches over to use Sterling instead. And amazingly, after 250+ votes on politics.ie, the Yes side are winning.
It may sound bizarre to some, but Hayek argued that government need not impose any currency on the territory under its control. The government could simply allow people to use whichever currency they choose. Most people would be likely to use the same one as everybody else in their everyday business (due to money’s network effects), which could be a foreign currency (Sterling, for example) or a new domestically produced currency (a Punt Nua issued by an Irish bank). This would then be the de facto, but crucially not the de jure national currency.
For it to work properly, the government would need to accept taxes in whichever form of money was being commonly used by the people. The government would also need to accept the loss of the ability to counterfeit and to devalue money (which it can be argued was the objective of nationalising money in the first place).
Imposing the Pound Sterling on Ireland would not represent a true liberalisation of the economy. However, by leaving the huge money-monopoly region called the Eurozone and using the currency of Ireland’s closest neighbour instead, with all of the implications which that has for a return to banking and fiscal sovereignty, it does appear to scream of common sense.
In these times of austerity, it’s good to know that taxes are still being spent on worthwhile projects – like arresting people for growing plants.
Much of the developed world is suffering a jobs crisis, and the experience for Ireland is worse than most. The Irish legal framework for the jobs market, beyond a basic minimum wage, has also had a complicated system of “Joint Labour Committees” which are capable of imposing additional wage requirements on particular sectors of the economy (affecting about 200,000 people). This system was found to be unconstitutional last summer. Replacement legislation is coming down the pipeline now, with the government promising to extend an employer’s right to plead “inability to pay“.
The current legislative proposals permit an employer – subject to certain conditions – to apply to the Labour Court for a derogation from the wage rates set in the sectoral wage agreement on the basis of inability to pay.
The derogation can be granted for between three months and two years – provided an employer has not been granted an exemption within the previous five years for the same workers.
The Labour Court must be satisfied that without the exemption, there would be a substantial risk to jobs or to the sustainability of the employer’s business.
The change is described by a government spokesman as “minor”. They don’t want to be seen to be undermining the wages of the low-paid, but the truth is that this system does no good at all for the people who need the most help, who are just below the bottom rung of the jobs ladder: those who are looking for work.
Involuntary “unemployment” would not exist in the free market; anyone who can work would be hired, if they would only lower their asking price. When market-clearing wage rates are illegal, however, unemployment is inevitable.
Thought experiment: Imagine that the price of a new car was set by government at an artifically high level, as a result of the government having been lobbied by manufacturers of some of the more expensive models. Imagine that you could only negotiate a lower price if you presented your case formally to a special government committee, who would decide whether or not you could afford it. Do you think that more or fewer new cars would be bought?
With thanks to Wicklowwolf over at Freedom Ireland.
Vincent Browne’s latest article created a bit of a stir online. The headline, “Technocratic, unelected governments are the ideal”, was always bound to attract attention. His core proposal is as follows:
If parliament was where policies were decided and a technocratic executive arm were directed to execute those policies and be held entirely accountable for doing that, then we might have democratic politics and accountable politics.
I would have thought that we already had a substantial technocracy in the form of the full-time employees of each government department: the ones who remain employed regardless of which government reaches power. It seems that this proposal would like to take things a step further so that the Ministers themselves, the chief executives of each department, were also unelected.
Voters would lose control over these appointments; they may be appointed in a similar fashion to the European Commission. Would this reduce corruption and improve accountability? Something tells me that it would not. Those who reached executive power would undoubtedly be friends and allies of politicians, except one stage further removed from voters. Wouldn’t we rather have the messiness of democracy than surrender to even greater bureacratic control? Even better, we could abandon the notion that government can produce a perfect society. Let’s discuss the alternative.