giovedì 5 marzo 2009

It's the Europhiles versus reality, and reality is going to win

Jeffrey Coolidge/Getty Images

During the current crisis we have several times heard invoked the wisdom of Milton Friedman about the unfeasibility of the euro as a currency surviving a recession. In an interview not long before his death three years ago, Friedman said: "The euro is going to be a big source of problems, not a source of help. The euro has no precedent. To the best of my knowledge, there has never been a monetary union, putting out a fiat currency, composed of independent states. There have been unions based on gold or silver, but not on fiat money - money tempted to inflate - put out by politically independent entities." It is what lies below the surface of this observation that is putting not just the euro, but the entire confection of the European Union, under such intense pressure. Any recession would bring into play tensions between idealism and nationalism: the desire by those who pilot the European project to maintain the confection for as long as possible and as intact as possible, that it might come out on the other side of this economic horror bloodied but unbowed; and the inevitable identification of hundreds of millions who stand outside the fantasy world of the political class with their own nation state, their own nationals and their own national interest. Without a degree of coercion beyond what even this undemocratic, Sovietized swindle has attempted in the recent past, the national interest will in the end prevail. - UK Telegraph

Dominant Social Theme: The EU was never meant to be.

Free-Market Analysis: The Telegraph is perhaps the only major newspaper in Europe/Britain to take a regular and determined stand against the European Union. It's articles and opinions are provocative because they bring up points that you do not ordinarily find elsewhere except in Europhobic blogs. And those blogs often don't deal with currency or business matters, preferring to focus on regulations and other issues that are slightly easier targets.

But ultimately it is the euro itself - the experimental trans-national currency - and its performance that is going to make or break the EU. And the time when the euro will be tested is not hypothetical anymore. The time is now. The euro as a trans-national currency considerably stresses numerous countries that utilize it. Since it is a fiat currency, not backed by any asset, its value is inevitably arbitrary. This means that for some nations, the interest rates associated with the euro are too high and for others possibly too low. During the good times this doesn't matter. But in the bad times, fiat money demands stimulation - or the value potentially drops all the way to zero. It is most difficult for those behind the single currency to provide the levels of stimulation demanded during a genuine economic crisis such as the one that is going on now.

Not only that, but a crisis such as this has exposed massive debt taken on by certain euro-nations, especially in Eastern Europe. A repudiation of debt - such as what occurred in Iceland - could blow the EU apart, so ways must be found to provide additional capital to these nations. The International Monetary Fund can play a role but the amount of capital necessary may call for more dramatic infusions. Where these will come from is most questionable. The EU leaders do not want Germany to pony up - they claim the union should handle the issue. How they will do remains to be seen.

Finally, there is the issue of protectionism. Protesting loudly that all of its actions are for the good of the union, France has already started down a protectionist path, demanding certain advantages for its troubled automobile industry. This is not surprising as, for the leaders of France, the EU was always a way to leverage France's influence on the world stage. To the degree that the EU does not advantage France, the EU's various regulatory postures will likely be either ignored or circumvented. But in doing so, France risks a considerable backlash from other EU countries - and were the backlash to grow too intense, the union itself could certainly be jeopardized, or at least put under further pressure. 

Conclusion: It is too early to predict the demise of the EU. Certainly its leaders are not naive and apparently the bet has been all along that a significant crisis will force the union closer together rather than pull it apart. Already, the idea of offering trans-national bonds has been floated in certain euro circles, an instrumentality that is currently not allowed. The idea, in this case, then, is that the crisis will push euro-nations into creating various kinds of financial arrangements that they would not easily tolerate in times of lesser stress. From the point of view of free-market thinkers, the twistings and turnings of Europe's monetary policies are likely unnecessary - and smack of ulterior motives having to do with empire building more than monetary rationalization. For free-market thinkers it is all fairly unnecessary. A little over a century ago, Europe had a valid, international monetary union. It was called the gold standard.

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