The Euro as a Money Monopoly
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.