The following was written for The Cobden Centre by Vishal Wilde.
The Eurozone is in dire need of monetary reform in order to revitalise the region. However, entirely free banking may be met with scepticism and, due to public sentiment against the financial services industry, could be politically infeasible. However, a supervised liberalisation that involves the creation of new, parallel monies via public-private partnerships could be a feasible, rejuvenating alternative for the Eurozone.
By auctioning the private rights to create money (in conjunction with public partners) as well as allowing Eurozone citizens to trade with and pay taxes in any of the resulting new Eurozone monies, a system of freer and more competitive banking can emerge which would greatly increase trade, investment and employment whilst also raising much-needed money to plug government budget deficits and lower taxes via auctions both in the short-run and medium-run.
In such a system, in addition to the Euro, the Eurozone would host other monies such as the French Franc, German Deutschemark, Greek Drachma, Italian Lira and even regional and local monies such as a Burgundy Francs, Bavarian Marks, Athenian Drachma, Milan Lira, Paris Francs, Vienna Marks and so on.
This article outlines some of the potential benefits that would result from such a system and contextualises it for the Eurozone. At the end, there is a brief detail explaining how such a system could be arrived at through some simple legislative amendments.
- Freedom of choice of currencies
For example, French residents, companies etc. would be allowed to pay taxes and trade in Euros, Francs (Belgian or French), Deutschemarks, Lira, Pesetas, Escudo, Guilder etc. and so would all other countries in the Eurozone. Therefore, the Euro would no longer be the Eurozone’s sole legal tender. In this way, currency users would have increased freedom to choose between using the supranational Euro, their domestic currency and various foreign currencies.
- Government auctions raising billions in revenue both in the short-term and medium-term
Suppose that, for example, the French government chose to introduce not only a French Franc but Paris Francs, Lyon Francs, Normandy Francs, Burgundy Francs, Bordeaux Francs and so on. Suppose that the French government chose to introduce a total of 25 local and regional monies. The French government could own a 50% share in each of these new money-issuing authorities but action the remaining 50% stakes to various companies, consortiums and so on (essentially selling licenses to print these new monies). Private companies and other entities would see an incentive in determining the monetary rules governing money creation, exchange and so on from monies that could make up a significant proportion of trade in the Eurozone. Suppose that all governments (German, Spanish, Greek, Italian, Belgian, Austrian and so on) all held such auctions for the local and regional monies they planned to introduce alongside the Euro.
Currently, Eurozone GDP is valued at $13.4 trillion. Suppose then that it is projected that, in the short-term, around 5-10% of trade would be conducted in these new monies. That would mean that anywhere between $670 billion and $1340 billion worth of trade would begun to be conducted in these monies in the short-term (i.e the next few years). Then, if each government was to auction a 50% stake in the money-making authorities (the newly created regional and state banks with their own unique licenses) and we further presume that, on a conservative estimate, 5% of the value of trade is raised, a total of anywhere between $33.5 billion to $67 billion could be raised through the initial auctions.
After a few years, once people have seen how their projections start to materialise, there would be further projections for the long-term. In the medium-term, perhaps (on a conservative estimate) 20% – 30% of trade would occur in these new monies. That would mean that between $2.68 trillion and $4.02 trillion of trade would be occurring in these new monies. At this stage, governments could further auction their remaining stakes in the money-issuing licenses to other entities and, thereby, raise even more revenue. Again, on a conservative estimate, suppose 5% of the value of trade is raised; between $134 billion and $201 billion would be raised from these round of auctions.
Clearly, the revenues raised could be used to plug budget deficits and cut taxes for the cash-strapped Eurozone citizens which would further stimulate the economy.
- Pragmatic reconciliation of rising and alarming nationalist sentiment
This would pragmatically reconcile both those who wish to remain with the Euro and those who want to leave it whilst preventing one group from unilaterally imposing their will on the other. It would be a stabilising concession to the rampant Nationalism sweeping across the EU.
- Benefitting both exporters and importers
In all countries, there exist regional disparities in economic structure. Some regions, towns, villages, cities, or boroughs are more heavily weighted toward certain industries, types of employment, export, domestic consumption etc. By allowing several currencies to coexist across many countries, this would enable areas and communities that make most of their living from exports to use a weaker currency as their predominant means of trade. This would effectively provide exporters with the option of boosting their sales by selling in relatively ‘cheap’ currencies. Conversely, those areas and entities that import more than they export can use a stronger currency as their predominant money; this would enable them to keep inflation under control (thereby preventing the suffering from imposed price rises, amongst other things, that would occur if governments had a monopoly over the money supply and artificially devalued it in the name of exporters and at the cost of importers). For example, those operating in tourism hubs could sell their goods in cheaper currencies in order to revive their local economies. Both importers and exporters would benefit from an arrangement where people could continuously choose the most advantageous currency.
- Increased money supply and demand in the Eurozone
With potentially 18 central banks in the Eurozone printing their own currencies (in addition to that printed by the ECB), there would, undoubtedly, be an increase in the money supply across the Eurozone and this would help stimulate the demand deficiency that is a major cause of its economic stagnation.
- Proliferation of currency-related technologies
Despite the potential complication of managing delivering different paper monies across various countries, this situation could become easily feasible in the near future when we consider the rapid proliferation and development of smartphones, e-wallets etc. This arrangement would enable and indeed encourage the proliferation of e-wallets and other technologies that will allow people to transact and switch between several currencies in a seamless manner rather than being constrained to one. It would reduce the need for cash in the first place and would encourage the Eurozone to move towards being a ‘cashless’ society (also, incidentally, reducing the scope for fraudulent activities in currencies).
7. Optimising trading preferences and improving creditworthiness
The distribution of exporters (who can use relatively cheap monies and, thereby, sell more), importers (who may choose to employ relatively strong monies so that they do not suffer from the inflation that using a relatively weak currency would impose upon them), consumers and producers more widely, savers, borrowers, creditors, debtors and so on who can act more optimally according to their various preferences implies increases in (expected) investment, (expected) profits, (expected) output, (expected) employment and so on; this not only means that both disposable incomes and tax revenues will increase but also that there will be a proportionate decrease in agents’ credit risk due to increases in the aforementioned variables.
8. Reduced demand for Euros, increased demand for Eurozone Sovereign Debt, reduced yields and restoration of peripheral Eurozone Sovereign Debts’ efficacy as collateral
The relatively reduced demand for Euros (due to increased demand for other foreign monies) would also naturally work to reduce its exchange rate, thereby making Eurozone Sovereign Bonds relatively cheaper (contributing to increased demand for them, increased prices of them and, therefore, reduced yields).
However, it may be argued that the decline of the Euro in recent years has failed to sufficiently lower sovereign debt yields; though this is true, the difference is that that decline was due to lack of confidence, potential defaults, possible exits etc. whereas, this time, improved expectations, creditworthiness, channels for lending etc. would help increase investment inflow and potentially contribute to Euro appreciation whilst the increased confidence would decrease yields by increasing demand for debt and increasing its price (thereby offsetting the possible demand-reducing effect of euro appreciation on sovereign bonds).
Whichever effect dominates, whether it be the improvement in confidence in the Eurozone, Euros and Eurozone governments or the devaluation of the Euro, the net impact would be an increase in demand for European Sovereign Debt, an increase in Sovereign Bonds’ prices and, therefore, a reduction in yields. Thus, both creditor and debtor entities would benefit from such an arrangement. Additionally, if there was a net devaluation of the Euro, this would mean that export-led nations such as Germany would indeed benefit from such an arrangement even in the short-term.
All of these benefits would help restore peripheral Eurozone Sovereign Bonds’ efficacy as collateral and, thereby, ease up on other credit market channels (such as the vital Repo market – the market for short-term secured cash loans – the International Capital Market Association’s “semi-annual survey of the European repo market estimates government bond collateral to account for almost 80% of EU-originated repo collateral”).
9. A wider range of available interest rates benefitting an inclusive demographic as well as decreased credit risk for both private entities and governments
Since banks would pay varying rates of interest on different deposits (being denominated in different monies), this range of interest rates will appeal to savers, borrowers, importers, exporters, consumers, producers etc. and the variety of interest rates means that, on a macro view, funds will be distributed across the interest rates according to the population’s’ specific preferences. This will also help contribute to an increase in savings and, therefore, loanable funds for investment (additionally, having increased rates available for savers will also help mitigate possible future pensions crises). Since, due to the range of interest rates, there would be a greater amount of saving (especially at the relatively high interest rates) than is currently the case, commercial banks’ deposits’ liquidity risk would also decrease.
However, this does not mean that borrowing would only be done at lower interest rates because not all agents will value the expected (relatively) low interest rate as highly as others. Some (such as importers, investors and other such people who are borrowing with the expectation that the purchases from their loan will provide a stream of future income or other such utility that offsets the loan payments), may pick a higher interest rate loan if it meant, for example, that they received a (relatively) high exchange-rate money because the stabilised expectation of a higher exchange rate is worth more to them than that of lower interest rate payments. Additionally, some may be willing to pay a higher interest rate on loans if they believed that the bank issuing that money had a more credible (or preferred) monetary policy.
10. Restricting asset-price bubbles, automatic trade balance management and reducing expected future volatility of credit risk
Given fluctuations in interest rates and exchange rates, enhancing taxpayers’ autonomy enables agents to switch from monies according to their changing preferences – thereby restricting asset-price bubbles and mitigating trade imbalances. For example, if one particular currency gets too devalued, agents will switch to another (relatively and appropriately) stronger money.
Since they could pay their taxes in this money, the government could also finance its debt more effectively with the increased proportion of taxes paid in that money (refer to 8). Hence, there would be a reduction in the expected future volatility of governments’ credit risk, which would work to reduce current bond yields through improved expectations.
Furthermore, Keynes (1936) once wrote that “It is, I think, arguable that a more advantageous average state of expectation might result from a banking policy which always nipped in the bud an incipient boom” and, though it is obviously extremely difficult (as has been observed) for Central Banks to know when to nip an incipient boom in the bud (or, for that matter, to know when there is an incipient boom), enhancing Taxpayers’ Autonomy might act as the automatic stabiliser that could help accomplish the objective of financial crises prevention that was intended through his speculative proposal for monetary policy in that agents would switch automatically switch according to their own changing preferences and prevailing market forces.
This hypothesis is consistent with George Selgin’s (1994) findings that banking crises were far less prevalent in free banking regimes versus central banking ones (though it must be conceded that this particular proposal is not for a wholly free or privatised monetary regime but merely for a pragmatic liberalisation in the usage of state monies that could tackle the current crisis whilst also acting as a stepping stone toward a Free(r) Banking system).
Furthermore, those with a high credit risk would not have as much access to cheaper credit as they do when compared to a regime with persistently and wholly low interest rates (like they have historically tended to when Central Banks depress interest rates) since people would rather save at higher interest rates (and, therefore, in certain relatively strong monies) and this means that a higher proportion of loanable funds will be available to borrow at higher interest rates and vice-versa. This ensures that credit bubbles will be restricted in future since people who compete for lower interest rate loans will have to exhibit lower credit risk to avoid higher interest rate loans and there will, most likely, be relatively less demand for loans at higher interest rates (though one might refer back to 6 to see why this last supposition may not necessarily be the case).
11. More effective debt financing with diversified tax income
Some governments would receive an increased proportion of its taxes in relatively stronger monies (since some countries are net importers) which would enable more effective servicing of Sovereign Debt denominated in Euros (thereby further improving the government’s creditworthiness); after all, since governments have borrowed in relatively cheaper monies (such as the Euro), then tax revenue received in relatively strong monies will allow, all other things equal, for greater reductions of debt in real terms.
For example, if one had €1000 of debt and received £100 in income instead of €100, they could pay off a greater proportion of the debt with £100 than with the Euros because British pounds enjoy a relatively higher exchange rate.
12. Dampening any potential negative impact of QE
Although it has been argued that the recent announcement of QE is welcome in the Eurozone, this is only insofar as there is currently deflation and people see no other alternative. However, these reforms will allow QE to be scaled back and stopped sooner rather than later and, therefore, ensure that the long-term effects of QE are dampened since there would be a lower proportion of securities that are linked to QE within the affected economies.
13. Less need for austerity
Since governments would gain more (tax) revenue, there would be more employment, and sovereign debt yields would decrease, austerity would be far less painful (possibly even wholly unnecessary if the increase in growth and tax revenue is large enough from all the increased investment, trade and so on).
How can this be achieved?
- Let Eurozone governments print their own national, regional and local monies.
- Let the ECB continue printing Euros.
- Require Eurozone governments to allow their citizens to pay taxes in any Eurozone money (Euros, domestic or foreign national currencies)
- Let all citizens and businesses in the Eurozone trade in any Eurozone money (Euros, domestic or foreign national currencies).
- Enable the creation of co-operative money through public or public-private partnerships through establishing state and regional banks.
- Require Eurozone governments to accept all public-public and public-private co-operative currencies as taxes.
- Enable all of the new monies in the Eurozone to be legal tender in each Eurozone country (i.e having multiple legal tenders per country) – in countries where legal tender has a more restrictive meaning than others, a liberalisation of legal tender legislation would be necessary. For example, in some countries, legal tender means shopkeepers are obliged to take that money for transactions (quite restrictive) whereas in some others it is just the money that debt can be handled through (fairly liberal).
- Allow public sector employees to choose the proportion of their money to be paid in (for example, a French civil servant in Paris could choose to be paid in 40% of Euros, 30% of French Francs, 10% Parisian Francs, 15% German Deutschemarks and 5% Normandy Francs, if he so desired).
Vishal Wilde is a finalist studying for a BSc (Hons) in Philosophy, Politics & Economics (Economics major) at the University of Warwick. He wishes to spend his life fighting for and defending freedom. He proudly serves Her Majesty in the Royal Naval Reserve, is a Freelance Journalist, he writes Poetry, Science-Fiction and Fantasy and conducts independent academic research in Economics, Political Science and Philosophy. He is also a Research Consultant for Fantain Sports, Pvt Ltd. (a tech startup based in India).