Euro Crisis

EuroCrash: A Political Crisis, Not a Currency Crisis

|

Money for nothing

In today's Washington Post, columnist Anne Applebaum has a nicely succinct (and depressing) summary of the ongoing Euro zone crack-up:

Though no one recognized it at the time, joining the euro was like adopting the gold standard: It meant that individual governments couldn't inflate their way out of trouble anymore nor pass on to the next generation the bill for today's expenditures — as they still can in the United States and Britain. All along, it has been a mistake to describe the euro zone's difficulties as a "currency crisis." In fact, it's a political crisis, caused by an addiction to debt, and it requires a political solution. Electorates have learned the truth: They are bankrupt. Whatever decisions the European Union now makes, future recovery depends on how much of the plain facts ordinary people can bear to absorb.

And what are the "plain facts" that Europeans must understand:

Europeans are being forced to face up to decades' worth of fundamentally dishonest politics. Since the 1970s, one government after the next has spent, borrowed and then inflated its way out of the subsequent debt. Then they recovered — only to spend, borrow and inflate once again…

Now they can't.

Whole op/ed is worth reading here. See Reason's extensive coverage of the Euro crisis here.

NEXT: Sheldon Richman on Gun Control and the Aurora Shooting

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. Europeans are being forced to face up to decades’ worth of fundamentally dishonest politics. Since the 1970s, one government after the next has spent, borrowed and then inflated its way out of the subsequent debt. Then they recovered ? only to spend, borrow and inflate once again…

    Now they can’t.

    I wouldn’t be a Canadian penny on that.

    1. It’s still a fiat currency. Which means someone somewhere has the power to print it to oblivion. And they will.

      1. Yes, just like when we had a gold standard! (Really, study your history). The key here is that there are several someones with the power to print to oblivion, and they act as checks against each other. Nixon took us off the international gold exchange becauses he wanted to print to oblivion but other nations with the power to print to oblivion were making it difficult for him.

        1. This line of rationalization is new to me. Please expand. How do various fiat currencies act as checks and balances on each other?

          1. It’s the fiscal version of Mutually Assured Destruction

            1. Except in this case, everyone is firing missiles.

              1. You assume that one nation benefits from inflating their currency if the other nations don’t. You’re wrong. The only people who benefit from inflation are the politically connected who get first dibs on the printed money. This leads to a mis-allocation of resources from the competent to the incompetent.

                1. I was not promoting the concept. I was attempting to mock it. Perhaps my analogy should be more explicit next time.

        2. That was with printing of bank notes in a fractional reserve system. We wouldn’t have inflationary issues and (smaller/localized) business cycles IF the government did not constantly step in and suspend specie payments, for years at a time in fact!

          If bank notes were treated as warehouse receipts for the money commodity (gold, silver, salt, iron hoes, whatever)–as they originally were–instead of money substitutes, with banks being liable for the loss of the client’s property (the real money backing the notes) there wouldn’t be that issue as they would be much more cautious.

          And this would be the natural outcome with a truly free banking system with a gold standard, (actually gold + silver parallel standards with floating exchange). That is to say, no government interference, no FDIC, no suspension of payments/redemption, no legal tender laws, etc.

      2. Exactly so. Its a lot harder to print Euros in tractor-trailer loads, because you have to get a number of different sovereigns on board, but its definitely possible.

        The key to this, I believe, will be when the European Central Bank finally gets permission to buy sovereign debt directly. That will be “QE” for the Euros, an open door for monetizing their debt, and they can finally debase their currency like jihadis in a whorehouse.

  2. It basically comes down to one group (Greece, Spain, Italy etc.) that in the past softened its currency versus the other group (Germany, Holland, Finland etc.) that preferred a hard currency. Why anyone would take the side of the soft currency nations, when it is pretty blatant how much worse their economies are now and were in the past, is beyond me.

  3. She’s too kind. Plenty of economists, including US economists across the spectrum, realized exactly that. As did Thatcher.

  4. adopting the gold standard: It meant that individual governments couldn’t inflate their way out of trouble anymore nor pass on to the next generation the bill for today’s expenditures

    And people look at goldbugs as lunatics for advocating a currency that doesn’t allow for this.

    1. PAULBOT!

      1. Bitcoin!

    2. While it is true that a gold standard does solve the problem of inflation caused by runaway printing of new money, the problem is the gold bugs have never successfully addressed the problems that gold backed currency pose.

      1st) Markets are naturally deflationary. If we assume a relatively flat supply of gold then you will very quickly have products whose price falls so low against that gold supply that it is impractical at best to pay for them.

      For example, today the price of gold is ~$57/gram. That means that if we switched to a gold standard an item which today costs $1 would become worth ~17.58mg of gold but as the technology to make that product and the market for it matures that price would begin to fall. With fiat money in theory at leas this could be balanced by inflating the monetary supply by an equivalent amount such that the price stayed steady. With gold no such action is possible and eventually you have people trying to keep track of of fractions of micrograms of gold,

      2nd) What happens to prices when there is a sudden wild fluctuation in the supply of gold, either because a large new supply is discovered or a measurable portion of the available supply is physically lost.

      Gold may be preferable to fiat currency but the problem with goldbugs is they try to act like it does not present it’s own set of problems.

      1. What happens to prices when there is a sudden wild fluctuation in the supply of gold, either because a large new supply is discovered or a measurable portion of the available supply is physically lost.

        When has that ever happened in the last 500 years?

        The real problem with the gold standard is that there are sometimes legitimate reasons to artificially increase liquidity in order to stave off a banking system collapse. But this is typically accomplished by simply suspending the standard for a period, not eliminating it altogether.

        1. there are sometimes legitimate reasons to artificially increase liquidity in order to stave off a banking system collapse.

          Or, you know, let the banking system collapse.

          1. Isn’t that effectively what they did in 1930?

            1. Sure, but the Fed was also responsible for expanding the money supply in the 20s. The later “legitimate reason” wouldnt have existed without the earlier “legitimate cause”.

              The government screwed up, so we need more government to fix it! isnt a valid argument.

              1. Money supply expansions aren’t the sole cause of asset bubbles. Removing the ability to expand the money supply doesn’t eliminate bubbles. So you still need a tool to deal with the destructive effects of bubble bursting.

                1. So you still need a tool to deal with the destructive effects of bubble bursting.

                  We have one: time.

                  1. We have one: time.

                    I do like your consistency in disregarding political realities.

                2. MP, money supply expansions are by far the biggest cause of bubbles. And all the monetary “tools” to fix the problem only make it worse

        2. When has that ever happened in the last 500 years?

          Spain, influx of New World gold and especially silver.

        3. It’s happened a few times.

          The Spanish conquest of the Inca and the subsequent inflow of gold and silver had a ripple effect of economic dislocations throughout Europe.

          As did the king of Mali spending a lot of gold in Egypt while on Hajj. If I recall correctly it caused huge problems for Venetian merchants.

          1. I picked 500 years for a reason. It was meant to be a starting point after those events.

      2. 1) No they arent. Inflation/Deflation have nothing (directly) to do with prices, they are to do with supply of money. If the gold supply is “relatively flat” (which it isnt, it slowly increases over time), that makes it neither inflationary nor deflationary.

        And the price thing is BS anyway. In the centuries of the gold standard that never happened. Of course, part of it is the existence of silver and copper and lesser metals for coinage. Its almost like they are fractions of gold!

        2) That is inflationary/deflationary. It hit spain when they starting pumping gold from the new world home. No worse than printing press today though.

      3. You do realize that the gold standard does NOT mean that everyone has to pay for everything directly with gold? You could have the same numismatically-worthless currency we use today, it would just be backed by gold. Obviously you wouldn’t be able to trade a single penny for 0.0001 oz of gold or whatever, but it would be workable in larger quantities.

        And when deflation makes that unwieldly, you just introduce smaller denominations of coins.

        1. My favorite conceptual currency is the SPY backed currency. Or any other index type ETF.

          If the US stock market grows, prices drop.

          If you got 100 Spidey-Bucks for each share, the current exchange rate would be a Spidey equal to $1.36.

          It would be a volatile currency.

        2. I would kind of rather just pay for everything with gold coins. But that’s more due to a lifetime of playing RPGs than economic ideology.

  5. “Maybe it’s time we stop trying to outsmart the truth and let it have its day.”

  6. Europeans are being forced to face up to decades’ worth of fundamentally dishonest politics. Since the 1970s, one government after the next has spent, borrowed and then inflated its way out of the subsequent debt. Then they recovered ? only to spend, borrow and inflate once again…

    If you use debt instruments as currency, you need ever-expanding debt. It is that simple. If you use something else as currency – pure fiat, commodities – you don’t have to expand debt continuously. But that doesn’t make money for our lords of credit, does it?

    All along, it has been a mistake to describe the euro zone’s difficulties as a “currency crisis.” In fact, it’s a political crisis, caused by an addiction to debt, and it requires a political solution.

    It’s actually both a political crisis and a currency crisis. The more immediate problem is a currency crisis. The overarching problem is the political power wielded by creditors to extract monopoly profits from the control of money and credit, i.e., actually-existing capitalism.

    Reading Applebaum’s column, it’s clear that she either can’t or doesn’t want to understand this.

  7. Ann: “Though no one recognized it at the time, joining the euro was like adopting the gold standard ….”

    Actually, a lot of people did, including Reason’s favorite Nobel Prize winner, Paul Krugman. And Ann’s moralizing is inaccurate as well. If northern Europe, particularly, of course, Germany and France, hadn’t wanted to create a “United States of Europe” in order to reclaim the global leadership they feel should be theirs, they wouldn’t be chained to disfunctional economies like Greece and Spain. It wasn’t financial irresponsibility that’s at the root of it all, but rather political delusions of grandeur.

    1. -1 spoof

      This is simply too reasonable of a comment to be Vanneman. Needs more asshole.

    2. Krugman hates anything that prevents monetizing debt. Don’t see how that scores him any points this side of the Laughter Curve.

  8. So, instead of being sovereign, independent nations, able to inflate their own currencies as they always used to do, EU nations are now in the same financial boat that US States have been in since 1787. Now we understand the deeper meaning of the phrase, “United States of Europe.” Can we expect an EU civil war soon (or are we already seeing one)?

  9. lol ok now that makes a lot of sense

    http://www.Anon-Rules.tk

Please to post comments

Comments are closed.