E.U. enthusiasts have recently scored a hat trick of good news. First, there was the election of Rothschild banking protégé Emmanuel Macron to the presidency of France along with a parliamentary majority, followed by the much-improved pre-election poll ratings of German Chancellor Angela Merkel, and now the Tories’ loss of their party’s once solid parliamentary majority in Great Britain’s snap election last June. Despite Brexit, despite economic stagnation across much of the continent and the tsunami of migrants flooding Europe, the political project of a European megastate is set to proceed.
The key wormhole in the central planners’ tottering but still grand scheme is the troubled euro, which is the handiwork of politicians, bureaucrats, and court economists whose vision proved to be more political than economic. The result is a kind of Ponzi scheme, a piling up of moral hazards, whose failure would take the entire E.U. project along with it.
Two recent books on the subject address the question that has been at the heart of the common-currency project from its very beginnings: Would the euro be the instrument of a new era of economic freedom and prosperity among the members of a tariff-free trade block supporting the cross-border movement of sovereign nations’ goods and services, financial capital, and citizens (as agreed by the 1957 Treaty of Rome), or would the euro chits, artificial paper instruments created by man and not by men over centuries of use and custom, accomplish the work of Caesar at which Charlemagne, Napoleon, and Hitler all failed?
The Euro, by the Nobel Laureate and dedicated Keynesian Joseph Stiglitz, gives us a committed centralizer’s view of the subject, while the German classical economist Hans-Werner Sinn tackles the subject from an opposing, largely free-market perspective in The Euro Trap.
Despite their different routes, the two authors arrive at a similar destination with regard to the problem of the single currency, which both men agree has been a colossal failure that today threatens the future viability of the European Union, whose continued existence they support.
The collapse of the Berlin Wall in 1989 gave the common currency project a new urgency. The French, spooked by the possibility of what would be a much-strengthened postunification Germany, saw an equal danger in the new states in Eastern Europe emerging from the collapse of the Soviet Union. What were once known as “the captured nations” had had a bellyful of socialism, empire, and centralization, and now wanted their freedom within a Europe united according to the design of the Treaty of Rome, whose terms did not require or provide for the rise of a megastate.
Those mostly French European socialists who wanted to salve the wounds of lost empire and bolster France’s eroded political influence glimpsed their defeat on the horizon and concluded that the single currency was a step toward a central state. The euro was to be the vehicle to get them where they wanted to go. Clever, those French.
France’s roll of the dice paid off, and a deal emerged. In January 1990, German Chancellor Helmut Kohl agreed to sacrifice the Deutschmark to a united Germany, and French President François Mitterrand, contrary to expectations, agreed to a central bank based on the hard-money model of the Bundesbank.
In one fell swoop and nearly single-handedly, the French had disarmed the Germans of their most effective weapon against French ambition.
Two years later, in December 1991, the Maastricht Treaty was signed, and a date of January 1, 1999, was agreed upon for the euro’s introduction. Ever since, the euro project has proceeded slice by slice in accord with the salami strategy political centralizers have long favored.
It is with the introduction of the common currency that Professors Stiglitz and Sinn begin their individual analyses. Each asks: What went wrong and why, and what is to be done?
In the euro’s early years, Europe boomed. Highly indebted countries like Greece, Spain, and Italy suddenly found themselves enjoying interest and domestic inflation rates that previously had only been privileges of the Germans.
Since the distressed members had fudged their own qualifications for euro membership years earlier, some doing so in cahoots with an undisclosed Goldman Sachs’s derivatives program (which neither Stiglitz nor Sinn discusses), the valuations at which their currencies entered into the euro system were set too high. The coming debt feast only exacerbated their original deceptions.
Euros in the form of loans from European and domestic banks flowed into the hands of those countries’ governments, enterprises, and consumers. Wage rates rose, productivity declined, governments initiated new vote-buying schemes, and entitlements grew alongside real-estate and construction bubbles. No matter: The cheap loans kept coming. Greece, a country that had lived for many decades by means of periodic currency devaluations, was an especially satisfied customer.
But Germany did not take part in the money frolic. As Professor Sinn points out and Stiglitz barely mentions, Germany in the early 2000’s was undergoing a self-imposed austerity, significantly reforming an overextended welfare state, outdated labor laws, and other economic inefficiencies while continuing to shoulder the one-trillion-euro cost of welcoming East Germany home. In time, German discipline yielded results that the euro magnified, serving essentially as an undervalued Deutschmark. The country’s export volumes surged, delivering an enviable prosperity based on trade, production, and a bargain-rate currency.
A restructured Germany re-emerged as the E.U. paymaster just as the consequences of the southern member states’ ongoing debt banquet manifested themselves. The bankers of northern member states reappraised their position and ceased the automatic rollover of sovereign nations’ debt. The economies of Greece, Spain, Italy, Cyprus, and even of France began to contract while interest rates on their sovereign bonds skyrocketed.
The profligate nations discovered they were trapped. They no longer had a national currency to devalue, and consequently the only adjustment possible was to lower their inflated wage rates, cut regulations, adjust taxes, and shrink government. In a word, austerity. Instead, the politicians, fearing the loss of their relative power, balked. (The only exception is Ireland, which stumbled first before any emergency lending was available, and which accepted a brutal program of austerity. Today, Ireland has largely recovered.)
The inability of the afflicted nations of the Eurozone to devalue their currency is a focal point of Stiglitz’s analysis; yet he insists that the error was not the introduction of a single currency for such a diversified membership, each with its own national central bank. The problem, Stiglitz says, is rather the E.U.’s “insufficient solidarity” and its failure to create institutions to ameliorate the realities of a single currency, by which he means structures designed to transfer the still-productive nations’ wealth to the laggards, as needed.
Stiglitz insists that what is needed is common deposit insurance in the European banking system. But he should know that this insurance basically exists already, according to the politicians’ fiat. This is what the 2013 Cyprus “bail-in” revealed. The holders of private accounts discovered that they are effectively insured up to €100,000, since only depositors holding an excess of that sum were subjected to the “bail-in.” But those accounts weren’t really “bailed-in” to anything; they were simply declared uninsured, and depositors paid the price (to the tune of losses between 40 and 60 percent) for holding overlarge sums of money in distressed banks.
Professor Stiglitz has spent most of his career in government service; first, as an advisor to a president (Clinton), later as either a head honcho of or a consultant to the international institutions (IMF and World Bank), and now as a tenured professor at Columbia University (thereby enjoying protection from competition). He is therefore what one might call a “plantation economist.” As such, for three decades he’s been wringing his hands over the world’s poor and downtrodden while dining out well on Other Peoples’ Money.
The Euro is careless of history, riddled with sins of omission, and thoroughly disdainful of the free market, whose tenets Stiglitz confuses with those of the infamous “Washington Consensus.” That’s a laugh, since the latter is a ten-point plan drawn from the received wisdom of fellow Ivy League plantation economists whose free-market rhetoric serves their own disastrous technocratic market-management programs. With an almost endearing lack of self-awareness, Stiglitz observes, “Policies tend to serve the interests of those who make them.” Indeed.
Readers who truly want to understand the euro system would be better served by Professor Sinn’s more sophisticated text. But my recommendation comes with a warning: There isn’t a ruinous rabbit hole Professor Sinn declines to explore. And he doesn’t muck about; as the longtime head of Germany’s Ifo Institute for Economic Research, he’s a man fully armed with facts, statistics, and the habit of Teutonic thoroughness.
Professor Sinn brings the proverbial fury of a woman scorned to the subject of the Maastricht Treaty’s Article 125, which states that no Eurozone member state shall be liable for, or assume, the commitments of another member state. It was a tip from Helmut Schlesinger, former president of the Bundesbank, regarding an odd entry in the Bundesbank’s account books that led to Sinn’s research into the European payments system. This, in turn, led to his exposure of the hidden mechanics that were transforming the E.U. into a de facto debt-and-transfer operation.
Sinn’s three exhaustively detailed chapters addressing his discovery serve, in part, to silence his academic colleagues who refused to believe that the problem even existed. Chief among them is a European Central Bank (ECB) official who suggested he might lose his reputation as a serious academic if he pursued the argument. (This gives us common folk a whiff of the policing methods of academe.) Today, the correctness of Sinn’s contribution is broadly accepted.
What Sinn discovered in 2011 were immense imbalances within the Trans-European Automated Real-time Gross Settlement Express Transfer System (TARGET2), which is used by countries in the Eurozone to clear cross-border transactions. These imbalances had grown exponentially in the wake of the global financial crisis, yet they were not obvious to observers because they were not clearly documented. And these imbalances are never netted; instead, they accrue year over year.
After Lehman Brothers failed in September 2008, “the interbank market seized up around the world,” and commercial banks in the countries of the E.U.’s southern tier had to borrow euros from their national central banks (NCBs) in order to pay for imports. The NCBs continuously lowered the quality of the collateral they required for these loans.
As a practice, commercial banks usually borrow freshly printed money from NCBs, buy government bonds with this money, and use these same bonds as collateral for credits. However, when no one wanted these securities, they lost their investment rating, whereupon the European Central Bank simply exempted the government bonds from the rating system. Thus, the game could go on.
The careless use of the payments system essentially allowed the southern-tier NCBs to print money with reckless abandon. In May 2010, all NCBs and the ECB itself began purchasing significant amounts of government bonds backed by ever-lower-grade collateral. (This is the means by which the purchasing power of Europe’s still-productive members has been deployed to bail out countries like Greece.) By 2012, the southern-tier banks showed deficits totaling over €600 billion, while the Bundesbank’s claims alone had climbed to €498 billion. The number of IOUs held by the NCBs,the ECB, and the Bundesbank has only increased in the subsequent years.
If a member country were to default or withdraw from the Eurozone, its IOUs would become worthless. The defaulter would have no euros with which to pay off its loans, and the Bundesbank, the IMF, the ECB, and the NCBs would be stuck with IOUs for which there is no market. A domino effect involving other countries could then develop and ultimately crash the entire euro system. This is the “euro trap.”
What particularly infuriates Professor Sinn is the continued ability of the southern tier to blackmail the ECB into lending based on increasingly dubious collateral in order to preserve the status quo of the Eurozone.
Sinn believes that there are two ways to get out of the trap that would allow the European Union to remain.
First, he recommends that the imbalances in the euro payment system be settled by mimicking the U.S. Federal Reserve System, whose debits are settled on an annual basis. If the Richmond Fed has a debit with the New York Fed, Richmond settles its account by sending gold certificates to New York. (Yes, that’s right, the regional Fed banks settle claims amongst themselves not with the fiat of their own production, but with real money—i.e., gold.)
Second, Sinn recommends what he calls a “breathing euro” and the creation of a “hospital program” for the hopelessly stagnating southern-tier countries. Greece, for instance, could temporarily return to the drachma, devalue, and then get her house in order—while legally remaining a member of the E.U. Once the country restored its competitiveness, it could then re-enter the Eurozone. Professor Stiglitz came to much the same conclusion under the rubric of a “flexible euro.”
But why would Greece’s present government ever drop out of the euro system? As things stand, Greece’s governing party, SYRIZA, can scapegoat the Greek oligarchy, the Germans, the ECB, the IMF, and Brussels while continuing to receive funds for its own operations. It has every incentive to remain attached to this international welfare scheme.
Only when the euro dips down to parity with the dollar will the overweening Merkel and Macron be likely to demand that the European Central Bank defend its common currency. Barring that, if the Eurocrats succeed in slowing down the national central banks’ printing presses and imposing “harmonization”—an E.U.-wide taxation scheme—the French may well get their megastate. But it will require greater forces now growing in our age of decentralization and devaluation to pry open the jaws of the euro trap.
[The Euro: How a Common Currency Threatens the Future of Europe, by Joseph E. Stiglitz (New York: W.W. Norton & Company) 448 pp., $28.95]
[The Euro Trap: On Bursting Bubbles, Budgets, and Beliefs, by Hans-Werner Sinn (New York: Oxford University Press) 368 pp., $45.00]