Some Fundamental Thoughts Behind The Tragedy Of The Euro

“The most important book on the Euro from an Austrian Economics point of view,” that is how Jeff Deist, President of the Mises Institute, referred to the book “The Tragedy of the Euro.” The book was written by Philipp Bagus, professor of economics at Universidad Rey Juan Carlos in Madrid, is a young scholar with a large influence, having forecast all the problems with the Euro and having persuaded many economists on the Continent that this currency is no better than any fiat currency (source: Mises Institute).

Jeff Deist speaks to author Philipp Bagus in the interview which is available below. We highlight some extremely interesting quotes from the interview. The discussion is a must-listen for everyone who wants to understand the fundamental issue with the Euro. The book has a dedicated page on the Mises Institute website where it is available in ebook format. Additionally, readers should definitely check the new summary of the book, written by Claudio Grass, managing director from Global Gold Switzerland, in his latest outlook report.

According to Philipp Bagus, the Euro was an attempt to get rid of the disciple of the Bundesbank (German central bank). The Bundesbank was trying to inflate less, due to the “inflation-phobia” from the German population (caused the hyperinflation of 1923) and the inflationary period after WW II. One German generation experienced the loss of all their savings twice. That is why the German central bank relied much less to the money printing machine than the other European countries. So if the other European countries wanted to keep the exchange rate more or less stable with the German Mark, they had to follow the monetary policy of the Bundesbank. In other words, if the French government had a deficit and wanted their central bank to finance it, there was a depreciation of the French Franc, which is embarassing to politicians. The Euro was an attempt to get rid of this discipline that the Bundesbank was putting on European monetary policy.

The following quotes from the interview contain some key thoughts on the fundamental issue of the Euro and why the currency is not achieving its objective of harmonization:

In essence, the real tragedy of the Euro is that one central bank (the ECB) can finance the debt of every sovereign nation. Politicians can “externalize” part of the cost; they spend or promise things/projects, create a deficit by doing so, and use the printing press to finance it (at least, partly). The banks in the Eurozone buy the bonds, they give them to the ECB as collateral for new loans, the ECB indirectly holds them; that is an indirect way to monetize these debts. The real cost is that the purchasing power of the Euro is lower than otherwise. So, for instance, for a Greek politician it is nice to externalize the cost of the government expenditures in the form of a loss of purchasing power of the Euro on foreigners (all other European citizens).

In reality, the ECB is more feeding nationalism rather than harmonization. Free trade leads to harmony, cooperation and peace. The Euro system breaks this up, as the system allows one nation or one political class to live at the expense of others in the same system. The Greeks had a very high government spending (eg pensions and other social expenditures) which was in essence financed by the printing press, so other Europeans have been paying for it. Almost nobody understood this redistribution until it became clear with the Euro crisis when Greece needed the series of bailouts.

A possible solution, detailed in the paper “How to exit the euro” by Philipp Bagus, would be to orderly exit the Euro by introducing a “gold Euro.” In such a scenario, all the gold in the European central banks would be used to back the Euro. Each country would have a different ratio of gold backing compared to the outstanding currency in that country. In order to get the ratios aligned between countries, there should be some redistribution necessary between the central banks, but it would result in a Euro that would be fully backed by gold.


Listen to the inteview

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