Money has a specific role in economic affairs – the facilitation of specialisation, trade and exchange.
Sure, money has a fantastic set of ancillary benefits, storing wealth, a common unit of account, measuring efficiency and success (or failure), deferring payments and so on, but the historical evolution of money has gone hand in hand with mankind dividing up the complexities of life, specialising in what they are good at and then freely exchanging the fruits of enhanced production. This process has made nearly all of us more comfortable in life than our forebears.
Yet the power of money has proved irresistible to policy makers the world over. Economic difficulties? Cut rates. Terms of trade harsh? Ease monetary conditions to change them. Government struggling to raise funds freely? Print money to buy the bonds.
Gradually authorities subverted and then nationalised money. The trend has been relentless.
Then, along came the Euro. Steeped in the ‘hard money’ tradition of the Bundesbank and the Deutschemark, the European Central Bank was created. The link between a single country and its currency was broken. Remember, the classic liberal standard was that money was Gold, and was not linked to a particular country or economy.
Money was divorced from political control.
The nuclear trigger of devaluation was removed.
Devaluation is an act of economic war – defraud your creditors, shunt your problems onto the unlucky devalue-ee, and create mayhem in your market pricing process by introducing inflation. Much better to honestly, and openly, default, then move on.
In a global crisis, not every economy can get rid of its problems by devaluing. Much as each country couldn’t protect its native industries by unilaterally raising tariffs during the thirties.
Time and again, the ECB was criticised for its hawkish stance, whilst the BoE and Fed printed away to solve our worries. Bankers hated ‘Dim Wim’ Duisenburg due to his ‘luddite’ attitude towards risk and fiscal responsibility and reluctance to respond to economic events. Oh how we now wish all our central bankers were a little less hip with the times…..
Now, don’t get me wrong. This was still a bureaucrat controlled affair, prone to forecasting and estimation errors. It is also a political creation, and what political will puts in place, it can change and destroy. It is not a structure or solution that any of us Cobdenites could advocate.
But, consider Europe’s problems. As ever, they are a failing of government (and its vassal bankers) not the market. What the ECB constantly sought to preach was the need for individual states to be disciplined in their financial affairs. The strong inference was that the ECB would not be there to bail out the irresponsible.
As the European sovereign debt market stumbles forward into its next crisis, the ECB looks set to crumble to political pressure and massively monetise the debts of the profligate, corrupt and incontinent states of Europe. Tragic as this is, the ECB held out a lot longer than its besieged brethren.
The failure of the Euro is a failure of bankers, regulators and politicians, not of the particular choice of the means of exchange that is used by people to do business.
If banks had been forced to survive without special favour, if governments had been forced to live within their means, and crucially, if the tax payers had not been forced to pick up the tab for corrupt bankers (and done this in 2008), we would be growing strongly by now, and the future would look a lot rosier.
And the Euro would be admired, respected and wanted the world over.
Two points to ponder:
Firstly, when the Euro exchange rates were locked, the common consensus was that Germany paid the price with an over valued Deutschemark locking them in at an uncompetitive rate. The PIIGS rejoiced at their advantageous rates. Germany went through tough years, and they had to become ruthlessly efficient to prosper. That they did: who is laughing now?
Secondly, Euro sceptics hail the UK experience of the ERM. We were killed by being in it, and flourished when we allowed the currency to float down after we left it. Sure, we benefited from the exit, but, applying an Austrian analysis to the situation, didn’t the discipline of the ERM membership force British industry to cut waste, reorganise and become hyper-efficient, so that when conditions eased, we could reap the benefits without unleashing yet another inflationary boom, destined to end in despair? A solid boom that lasted for nearly an unprecedented (for us) two decades?