Archive for the ‘Europe’ Category
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.
It’s a sign of the times that every public debt offering in Europe has become a “risk event”, with the Irish government among the most vulnerable to what would be a catastrophic collapse in demand. And no longer empowered to produce its own counterfeit money, it is ultimately reliant on the ECB to remain solvent.
The Sunday Independent reports that the ECB has finally started to play ball, providing the funds to ensure that no Irish government bond is left unbought:
Irish banks are using billions of euro from the European Central Bank (ECB) to buy up Irish government debt, the Sunday Independent can reveal.
It has emerged that the banks were “active” in a recent Irish government bond sale of about €1bn, and it was confirmed yesterday the repossession of Irish bonds at the ECB has occurred.
Irish banks are using ECB funds to “create the illusion” of demand on the international markets.
Market abuse may arise in circumstances where investors have been unreasonably disadvantaged, directly or indirectly, by others who:
* have used information which is not publicly available (insider dealing);
* have distorted the price-setting mechanism of financial instruments;
* have disseminated false or misleading information.
Of course, the governments themselves would never do anything like that.
From about 5:00:
“You know, all the guys watching this program will know people who are in debt. You know, they have got five credit cards. They have overspent on them. And what would be the advice that you would give to somebody in that situation? You would say, curtail your spending. You know, try and live within your means. Keep your budget down.
But, when it is a government, the advice is, no! Spend more! There’s this brilliant magic wand called Keynes. And it means that, the more you spend, the more you borrow, the better you’re going to actually make the economy.
Well, you have to be either a banker or a politician to think that way.”
I’ve written at reasonable length before on the nature of the EU, inspired very much by some thoughts expressed by Hoppe. Now I’ve found a paper by Jorg Guido Hulsmann which goes into the matter in some detail:
The basic idea is that states are motivated to unite by two important problems: on the one hand by the unavoidable internal limitations on power they each face, and on the other by the difficulty and risk associated with military expansion. There is a fascinating comparison made with the progressive centralisation of insolvent fractional reserve banks, eventually joining together under a central bank to avoid going out of business. In a similar manner, governments may unite in order to pool their debts and thus prevent collapse while staving off a hyper-inflation and managing to continue their repayments.
Of course an EU balance sheet has not yet replaced Europe’s national balance sheets, but most banking systems have already merged under the ECB and the process of unification continues, notwithstanding some complications.
Libertas has correctly pounced on comments from the French finance minister that the CCCTB would be pushed ahead in the Autumn.
No doubt there will be consternation in Government buildings this morning at Ms. Lagarde’s remarks. She’s gone and given the game away!
On a more serious note, the fact of the matter is that a common corporate taxation base is the number one item on the agenda for the European Union after the ratification of the Lisbon Treaty.
A Common corporate tax base would destroy the Irish economy. In a challenging economic environment, the stakes could not be higher.
I agree that this is very worrying, but I can’t help feeling that it’s already too late; that we’ve already been “sold down the river”, as it were; in the words of Peter Hitchens, that Ireland, like Britain, is already a “subject province of a European superstate”.
I remember, years ago, reading “No Logo” by Naomi Klein, in particular Chapter 7, “Mergers and Synergy”, and being genuinely convinced of the threat posed by corporate mergers. It took me a while but I eventually recognised that the power concentrated by merging businesses was as nothing (and of a very different kind) to the power concentrated by merging governments.
An applied comparison would be as follows: ABC and Disney use their merger to enjoy productive synergies from their combined media products on the one hand, while on the other the European governments use the EU to strengthen their monopolistic power of “continual, institutionalized property rights violations” (Hoppe) over European citizens. Are these equally fearful?
The centralised European superstate which we are rapidly approaching will, by abolishing national governments, remove the incentives these have to compete with each other and with other governments around the world.
This crucial idea is something that statists never seem to deal with. They don’t seem to understand (and I don’t blame them – it took me quite a while, and it’s not the sort of thing that gets explained frequently) that a government is really just a type of business: it provides “services” (legal, policing, security, health, education, etc.) to “consumers” (citizens). The only difference between a government and any other kind of business is that a government achieves its objectives through physical force. This is the simple reality: the government is just a special kind of business – one that successfully exercises violent monopoly powers over the people in the territories it controls.
For example, I explained in a comment at Cedar Lounge that the notion of competing governments I have been describing could be used to interpret “the emergence of European civilisation from the Holy Roman Empire, economic growth in a decentralised US through the 19th and early 20th centuries, and the high levels of wealth found today in relatively small, independent countries such as Luxembourg, Switzerland, Ireland, Iceland and Hong Kong (and havens Liechtenstein, Monaco, etc.)”
One reply I got was that “the most powerful agent of centralisation in the modern world is international capital. Given the choice, I think global and regional democracy is better than a dictatorship of such vested interests.”
Obviously this person is approaching the question from somewhere closer to Naomi Klein’s perspective than my own. I believe that my logic stands, but perhaps it’s worth asking the question: whose perspective has the greater interpretative power?
Consider the 2000 merger between Time Inc. and Warner Communications, a huge concentration of power resulting in Time Warner Inc. and ranked as one of the biggest mergers of all time. The new entity had a 2007 revenue of $52.5 billion. Pretty big, right?
Yes it is. But the most recent Irish government budget was bigger than that, at $53 billion. And this is a budget that is obviously miniscule compared to the budgets of other European governments. A merger of all of these governments, as we are witnessing with the EU, is then hundreds of times bigger in sheer monetary power (never mind legal and military power) than even the largest kind of corporate merger. So how does this fit with the idea that “the most powerful agent of centralisation in the modern world is international capital.” Unless we are talking about government capital, I don’t see how it fits at all.
The reasons to oppose the advancement of the EU project are profound and not merely nationalistic or conservative. They are grounded in fundamental truths about the nature of politics, our experience of history and our understanding of political economy. If you have any sense at all of the dangers of centralised power, you should recognise the EU for what it increasingly looks like: a serious threat to our freedoms and prosperity.
I don’t know all that much about Libertas, but their campaign against the Lisbon Treaty is bound to be interesting. I don’t really share their views (in favour of “a strong, accountable, European Union”) and I can’t see them holding back the historical forces of EU power centralisation, but it’s very refreshing to find opposition coming from sources other than traditional leftists and nationalists. It’s no small thing to speak up against an Establishment virtually united against you.
For what it’s worth, my own opposition to the EU is based on a few simple ideas. The simplest one is that having many smaller states makes it easier for people to emigrate and escape from bad governments, thus putting a limit on how badly governments can abuse their citizens and resulting in competition between them to provide attractive places for people to live.
The EU points to a future where we will no longer be able to elude governmental abuse without leaving Europe completely, a circumstance which will have very serious consequences indeed. We would be far better off not centralising power, but decentralising it.
It’s not something you are likely to hear brought up in the media debate on the Lisbon Treaty, but this is, in my humble opinion, the theoretically and historically sound analysis which we should be applying to the question of the European project. The logical planks of the argument are very easily laid out: since central planning fails, but is unlikely when political power is decentralised, we conclude that the polycentrism of small, competing states is preferable to hegemony.
Note the crucial distinction made by Professor Hans-Hermann Hoppe (bold mine):
It is said, for example by the bureaucrats of the European Union in Brussels, that economic prosperity has increased dramatically with increased political unification. In reality, however, political integration (centralisation) and economic (market) integration are two completely different phenomena. Political integration involves the territorial expansion of a state’s powers of taxation and property regulation. Economic integration is the extension of the interpersonal and interregional division of labour and market participation. In general, the smaller a country and its internal markets the more likely it is that it will opt for free trade.
I think that a world consisting of tens of thousands of distinct countries, regions and cantons, and hundreds of thousands of independent free cities such as the present-day “oddities” of Monaco, Andorra, San Marino, Liechtenstein, Hong Kong, and Singapore, would be a world of unprecedented prosperity, economic growth, and cultural advancement.