David R. Henderson  

Wolfgang Kasper on the Euro

Today on the Eurozone Crisis... Shock Me, Shock Me...
When, as a Senior Fellow at the Kiel Institute of World Economics in Germany, I wrote my PhD thesis about international monetary affairs, it became clear to my colleagues and me that an imposed Europe-wide currency would be a stillborn child.
This is from this month's Feature Article, "Nothing New on the Euro Front," December 2011 by German-born economist Wolfgang Kasper who moved from Germany to Australia in the 1970s.

Kasper continues:

By now, it is evident that the idea of a continent-wide Europe growing into a harmonious family is an illusion. In reality, solidarities are increasingly strained, and petty hatreds and resentments emerge and are exploited by political opportunists on the fringes. Crude protest slogans are scratched into Mercedes cars with German number plates parked on Athens streets; Greek politicians demand German compensation for Nazi crimes committed seventy years ago; street demonstrators in Berlin revile Spaniards and Portuguese; and the young, unemployed Spanish indignados become furiosos, occupying city centers and demanding that their government stop obeying directives from Brussels and the 'Berlin-Paris Axis.' As the political decision makers subordinate every other economic variable to the political goal of fixed exchange rates under a single currency, Southern job losses and enforced cutbacks in government programs impose harsh sacrifices on Mediterranean Europeans. With good reason, the Greek middle class now dreads anome (Greek for loss of order and trust in the future), and a young generation is profoundly cynical about all politics. This is likely to destabilize and weaken Old Europe in the long term.

Why do Eurocrats hang on to the goal of saving the Euro? Kasper suggests one reason:
One major reason that "Eurocrats" reject the idea of exchange-rate flexibility is that they want more influence and direct tax receipts. So far, they have had to depend on national tax collectors and remittances. If the Euro crisis produces plausible arguments for more Europe-wide regulations and new taxes that go directly to the unelected masters in Brussels--whether they are taxes on international capital transactions, airline tickets, or whatever--the crisis is welcome. Crises always favor politicians and bureaucrats. Just as "war is the health of the state," in Randolph Bourne's famous phrasing, so are crises in general the health of the state.

Kasper ends with a proposal:
The technical and administrative problems with an introduction of a New D-Mark could also be solved: The government can declare that to forestall an imminent crisis, it has, most regrettably, no other option but to withdraw legal tender status for all Euro banknotes that do not carry a German identifier (all banknotes show a national code). All other Euro notes and coins will be exchanged at a fixed rate within three months. Political leaders can, after all, explain that it is free travel, free trade, free capital and enterprise movements, and the freedom for young Europeans from different countries to marry that matter for European integration, prosperity and lasting peace, not the artificial bond of an imposed unitary currency.

COMMENTS (6 to date)

I am a student of economics and I am still trying to learn what it is about the European monetary union that causes the present crisis.

On one hand, it seems to me that an organization, whether government or private, that issues a currency need not worry about the fiscal responsibility of any parties who use the currency. If parties unrelated to the currency-issuing organization break their promises to each other, why should that be a threat to the currency?

So I suppose it must be that the contract forming European monetary union includes provisions which go beyond issuance of a currency; it must be that the various European states have insured each others' debt, or invested in each others' national banks, or something like that.

I wish the news reporting that reaches my level would expose those provisions of the European monetary union over and above issuance of a currency, provisions that I suppose are the real cause of the crisis

Yancey Ward writes:

How would one determine whether the bank account was deposited with German coded currency, now or in the future.

Carl the EconGuy writes:

The idea that Eurocrats hang on to the permanently corrupt and underperforming PIIGS strikes me as preposterous and just ludicrous. Why pay gazillions of euros to keep these blood sucking parasites in the club? I think there's another game afoot. The Germans, by demanding extraordinarily tight fiscal control over weak nations, are seeking the most obvious and simple solution possible -- a voluntary exit from the euro by Greece, Italy, Spain, and Portugal. That will leave a smaller but functioning euro zone, and the European Union can continue as before, with no changes in the Treaty required. The PIGS can then resort to their old tactics: inflation, devaluation, stagnation, and continued corruption. It's better that the countries remaining in the euro zone then work on bailing out their own banks, than to insist on internationally financed bailouts of non-reformable countries.

Gary Rogers writes:

I think Richard has it exactly right. There is no reason my deadbeat neighbor down the street cannot use the same currency I use even though his credit rating is horrid. There is also no reason I cannot share the same currency with billionaires like Warren Buffet and Bill Gates. The problem is not the shared currency. The problem is allowing countries to build up huge debts without any risk premium. There is one difference and that is the inability of irresponsible countries to extend the day of reconing by printing money but that may prove to be a blessing. Wait and see what is in store for the United States after our debt crisis turns into a sovereign currency crisis because we do just what the European countries want to do.

Richard Allan writes:

Yancey Ward, it wouldn't matter what currency was used to open the account, just what currency the bank has in its vaults at that point. Bank deposits aren't Euros as such, just a promise to repay Euros. The onus is on the bank to make sure it can get the Euros as necessary.

I sympathise with the thoughts expressed thus far in the comments about currency unions in general. However I would add a possible justification for separate currencies: if there are structural differences that mean different interest rates prevail in different parts of the Eurozone (talking about interest rates more broad than just the yield on government debt) despite free movement of capital, then monetary policy following the Friedman rule would demand faster deflation in the areas with higher interest rates. Of course this is moot in the current crisis because the PIIGS certainly aren't demanding the right to deflate faster. Also if the higher interest rates are the result of labour policy, then downward wage stickiness might counteract the desire for deflation somewhat.

Fergus O'Rourke writes:

European fellow-feeling has undoubtedly been damaged by the developments of the last few years.

But that damage can be exaggerated. The mood on the streets is not irrelevant but it's as representative of the general sentiment as the Occupy phenomenon.

In my humble opinion.

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