Conclusion

The institutional setup of the EMU has been an economic

disaster. The Euro is a political project; political interests have
brought the European currency forwards on its grievous way and
have been clashing over it as a result. And economic arguments
launched to disguise the true agenda behind the Euro have
failed to convince the general population of its advantages.
The Euro has succeeded in serving as a vehicle for centralization
in Europe and for the French governments goal of establishing a
European Empire under its controlcurbing the inuence of the
German state. Monetary policy was the political means toward
political union. Proponents of a socialist Europe saw the Euro as
their trump against the defence of a classical liberal Europe that
had been expanding in power and inuence ever since the Berlin
Wall came down. The single currency was seen as a step toward
political integration and centralization. The logic of interventions
propelled the Eurosystem toward a political unication under
a central state in Brussels. As national states are abolished, the
market place of Europe becomes a new Soviet Union.
Could the central state save political elites all over Europe?
By merging monetarily with nancially stronger governments,
they were able to retain their power and the condence of the
markets. Financially stronger governments opposed to abrupt
changes and recessions were forced help out. The alternative
was too grim.
161
162 The TRAGEDY of the EURO

Mediterranean countries and particular the French govern-

ment had another interest in the introduction of the Euro. The
Bundesbank had traditionally pursued a sounder monetary
policy than other central banks, and had served as an embar-
rassing standard of comparison and indirectly dictated mone-
tary policy in Europe. If a central bank did not follow the
Bundesbanks restrictive policy, its currency would have to
devalue and realign. Some French politicians regarded the
inuence of the Bundesbank as an unjustied and unacceptable
power in the control of the militarily defeated Germany.
French politicians wanted to create a common central bank
to control the German inuence. They envisioned a central bank
that would cooperate in the political goals. The purchase of
Greek government bonds from French banks by an ECB led by
Trichet is the outcomeand a sign of the strategys victory.
The German government gave in for several reasons. The
single currency was seen by many as the price for reunication.
The German ruling class beneted from the stabilization of
the nancial and sovereign system. The harmonization of
technological and social standards that came with European
integration was a benet to technologically advanced German
companies and their socially cared-for workers. German ex-
porters beneted from a currency that was weaker than the
Deutschmark would have been.
But German consumers lost out. Before the introduction of the
Euro, a less inationary Deutschmark, increases in productivity,
and exports had caused the Deutschmark to appreciate against
other currencies after World War II. Imports and vacations
became less expensive, raising the standard of living of most
Germans.
Sometimes it is argued that a single currency cannot work
across countries with dierent institutions and cultures. It is
true that the scal and industrial structures of the EMU coun-
tries vary greatly. They have experienced dierent rates of price
ination in the past. Productivity, competitiveness, standards of
living, and market exibility dier. But these dierences must
not hinder the functioning of a single currency. In fact, there are
very dierent structures within countries such as Germany, as
 Conclusion 163

well. Rural Bavaria is quite dierent in its structure from coastal

Bremen. Even within cities or households, individuals are quite
heterogeneous in their use of the same currency.
Moreover, under the gold standard, countries worldwide
enjoyed a single currency. Goods traded internationally between
rich and poor countries. The gold standard did not break down
because participating countries had dierent structures. It was
destroyed by governments who wanted to get rid of binding,
golden chains and increase their own spending.
The Euro is not a failure because participating countries have
dierent structures, but rather because it allows for redistribution
in favor of countries whose banking systems and governments
inate the money supply faster than others. By decit spending
and printing government bonds, governments can indirectly
create money. Government bonds are bought by the banking
system. The ECB accepts the bonds as collateral for new loans.
Governments convert bonds into new money. Countries that
have higher decits than others can maintain trade decits and
buy goods from exporting states with more balanced budgets.
The process resembles a tragedy of the commons. A coun-
try benets from the redistribution process if it inates faster
than other countries do, i.e., if it has higher decits than others.
The incentives create a race to the printing press. The SGP has
been found impotent to completely eliminate this race; the Euro
system tends toward self explosion.
Government decits cause a continuous loss in compe-
titiveness of the decit countries. Countries such as Greece can
aord a welfare state, public employees, and unemployment
at a higher standard of living than would have been possible
without such high decits. The decit countries can import more
goods than they export, paying the dierence partly with newly
printed government bonds.
Before the introduction of the Euro, these countries devalued
their currencies from time to time in order to regain competi-
tiveness. Now they do not need to devalue because government
spending takes care of the resulting problems. Overconsumption
164 The TRAGEDY of the EURO

spurred by reduced interest rates and nominal wage increases

pushed for by labor unions increase the competitive disadvantage.
The system ran into trouble when the nancial crisis accel-
erated decit spending. The resulting sovereign debt crisis in
Europe brings with it a centralization of power. The European
Commission assumes more control over government spending
and the ECB assumes powers such as the purchase of gov-
ernment bonds.
We have reached what may be called transfer union III.
Transfer union I is direct redistribution via monetary payments
managed by Brussels. Transfer union II is monetary redistribution
chanelled through the ECB lending operations. Transfer union
III brings out direct purchases of government bonds and bailout
guarantees for over-indebted governments.
What will the future bring for a system whose incentives
destine it for self-destruction?
1. The system may break up. A country might exit the
EMU because it becomes advantageous to devalue its currency
and default on its obligations. The government may simply not
be willing to reduce government spending and remain in the
EMU. Other countries may levy sanctions on a decit country or
stop to support it.
Alternatively, a sounder government such as Germany may
decide to exit the EMU and return to the Deutschmark. German
trade surpluses and less inationary policy would likely lead
to an appreciation of the new Deutschmark. The appreciation
would allow for cheaper imports, vacations and investments
abroad, and increased standard of living. The Euro might lose
credibility and collapse. While this option is imaginable, the
political willfor nowis still to stick by the Euro project.
2. The SGP will be reformed and nally enforced. Auster-
ity measures and structural reforms in decit countries lead to
real economic growth and eliminate the decit. A one-time
haircut on bonds of highly indebted countries may reduce the
existing debt burden.1 Harsh and automatic penalties are enacted
1
A (partial) default of a government would not necessarily imply an exit from
the Eurozone. However, a partial default could trigger a European banking
crisis and also the sell-o of bonds of other governments. The higher interest
 Conclusion 165

if the three percent limit is infringed upon. Penalties may consist

in a suspension of voting rights and EU subsidies, or in outright
payments. But there are incentives for politicians to exceed the
limit, making this scenario quite unlikely. The members of the
EMU are still sovereign states, and the political class may not
want to impose such harsh limits that diminish their power.
3. Incentives toward having higher decits than the other
countries will lead to a pronounced transfer union. Richer
states pay to the poorer to cover decits, and the ECB monetizes
government debts. This development may lead to protests of
richer countries and ultimately to their exit, as mentioned above.
Another possible end of the transfer union is hyperination
caused by a run on the printing press.
In the current crisis, governments seem to be hovering
between options two and three. Which scenario will play out in
the end is anyones guess.

payments on bonds would most probably trigger these governments down-

falls. As the situation might get out of control, governments have tried to
prevent such a situation and resisted haircuts so far. Moreover, a default alo-
ne would not be sucient to substantially reduce the decit in most coun-
tries. Interest payments on existing debts make up only the smaller part of
decits. [Desmond Lachman (2010, 31) writes that had Greece and Ireland
successfully managed to halve their public debts through restructuring in
2009, they would have still been left with budget decits of over 10 percent
of GDP.] If governments want to get around austerity measures and struc-
tural reforms, they would have to leave the Eurozone in order to be able
to inate their way out of their decit problems. The implied devaluation
would impoverish the population of these countries immediately.