Shrewd Eurocrats Screwed Europeans

Wim Duisenberg, the 70-year old Dutch founding chairman of the European Central Bank, died today at a moment when his creation, the euro, is under threat. According to Italian Prime Minister Silvio Berlusconi, “everybody” has been “screwed” by the euro.  Berlusconi’s statement is generally perceived as marking the beginning of the campaign for the Italian general elections of May 2006. A shrewd politician, the Prime Minister is expressing the gut feeling of many Italians.

Earlier this month European Meltdown, a report by HSBC, the world’s second largest bank, caused a stir by suggesting that countries such as Italy, the Netherlands and Germany might benefit from switching back to their national currencies of yesteryear. One of the reasons for the overwhelming Dutch rejection of the European Constitution two months ago is perceived to be a general sense of having been cheated when the guilder was replaced by the euro in 2002.

Recently the economist Hans-Hermann Hoppe explained how and why “everybody” has been harmed by the introduction of the euro.

Money develops naturally in a free market because there is a need for a highly marketable goods facilitating exchange. Historically such goods have been gold or silver. Money was originally a commodity money with an intrinsic value. Over time all states have destroyed the commodity money by replacing gold and silver with paper money. This was done in a three-stage process.

First the states established for themselves the monopoly to mint gold and silver. This monopoly allowed them to reduce the content of gold and silver in the coins. The second step was to monopolize the right to issue money substitutes, such as paper tickets entitling the bearers to a certain quantity of gold or silver. This monopoly allowed the state to print more paper tickets than the gold or silver available. This in turn caused inflation: a fall in the market value or purchasing power of the paper tickets. Thirdly, and finally, because the state felt that sooner or later it would have to admit that it was virtually bankrupt because it no longer possessed sufficient amounts of gold or silver to repay the value on all the tickets, the tie between between paper and gold and silver was cut, creating a pure paper money.

The latter has allowed the states to produce money at will – something they could never do under a gold or silver standard. Producing money, however, did not produce additional wealth. Doubling the amount of money in this way does not imply that a society has become twice as rich as before, because the amount of goods has remained the same. Doubling the amount of money only affects prices – a process which leads not to the creation but to the redistribution of wealth. Prices will adjust. Unfortunately, they do not do so overnight but need some time to adjust. The people who get the new money (i.e. the additional bank notes and coins) first, before the adjustments take place, are in a position where they can buy at the initially lower prices. It are always the Central Bank, the leading commercial banks and the leading clients of these banks (including the government) who receive the new money first. These are the ones who gain at the expense of the people whose income has not gone up yet when the prices gradually begin to rise. The increase in the amount of money redistributes wealth to those who control the supply of money at the expense of the ordinary citizens who get the new money very late in the game. In this way the citizens (“everybody”) get cheated.

The existence of multiple national currencies prevents such a thing from happening because if one country prints more paper tickets than others the value of its currency will fall against other currencies. In a system of various currencies governments cannot inflate as much as they like. If they do, they risk the devaluation of their own currency. By reducing the competition between different paper moneys, through the creation of a single currency, the European monetary authorities have been able to redistribute wealth in a stealthy fashion. Ordinary people, however, feel they have been robbed. The euro eliminated the previously existing barriers against inflation and against redistribution of wealth in favour of the state.

The euro is a currency which is more inflationary than the most inflationary of the previously existing currencies. This explains why even the Italians are complaining. Monetary centralisation is as bad as political centralisation. The worst thing that could happen is the creation of a world paper money issued by a world central bank which, by definition, can no longer fall against any other paper currency because there is no other paper currency. The euro has been a decisive step in the direction of such a “mundo.” Let us therefore hope that the euro collapses before the “mundo” cheats us all.

You can watch or listen to the speech of Hans-Hermann Hoppe:
audio of the main speech (MP3, 24 MB, 52 minutes)
video of main speech and Q&A (WMV, 66 MB, 74 minutes)

The part about monetary centralisation starts at 23 minutes into the recording and ends at 31 minutes.

Wasn't it Italy in

Wasn't it Italy in particular that had such a big problem with run-away inflation in the decades prior to the EC/EU?

Unsubstantiated nonsense

Sorry both this text and speech are rife of good-sounding conspiracy theories but contain no pointers to sound economical research. Not surprisingly historic development proves you wrong.

For example the European monetary area undergoes little inflation especially compared with the individual currencies they replaced. Even when commodoties like steel and oil reach record prices, inflation is stable at around 2%. If at all most economists ask for a loosening of the money policy.

Next it is simply untrue that the threat of devaluation deterred countries with individual currencies from printing money to solve their money problems. In fact they did exactly so in great abundance and hence we, the people, suffered multiple devaluations. It was only after the embrace of international trade and systematic elimination of said trade barriers (like the unnecessary premium paid for currency risks when in fact those risks don't exist anymore because the different economies are integrated enough and thus not different anymore)

Also your nostalgic overview of monetary development is biased and conveniently limited. ) You fail to mention the role of money creation through lending (intertwined with the development of papermoney) that DOES create economical wealth by better matching resourceful investors with creative entrepreneurs who need capital goods to develop their ideas.

You seem to like a gold standard (the good professor even calls governments abondonding it fraudsters). But you fail to see that using gold as a unique measure of value de facto creates your 'mundo' currency. And is in fact the practical inflexibility inherent in such a system that makes a gold standard currency break down time and time again.

The stability pact and Lissabon

I do not completely agree with the statements of the author of this text. First of all it is strange to see that the first reactions from prominent politicians of e.g. Italy to abolish the euro out of the economy came after the French 'no' to the European constitution. In that point mr. Belien has absolutely right: Because the project of European centralisation seems to fail after the French (and Dutch) rejection of the European constitution with its centralist contains; some politicians are now afraid of losing control over the euro. So it seems that we have to 'pay' for the euro in amounts of European political centralisation. The Italians were blamed for their point; but now Berluscani had relanced the Italian point of view.

A reintroduction of the national currencies does not make any sense, in my point of view. Both the Belgian Association of Banking Companies and the Flemish employers-association VOKA do not wish to see reintroduced the Belgian franc, because the euro does take away the risk of exchange rates and inflation between the different European countries, which makes its more supportable to invest in other European countries. This is certainly an enormous advantage, and this advantage can be seen more usefull when we just observe the geographical fact that Europe is relatively a 'small' continent, made of relatively 'small' countries where it's very easy to cross the borders quickly.

But the thing that worries me is the fact that there's decided to get rid of the stability pact, which implies that a euro-country's budget deficit may be no higer than 3% of its GDP. This decision was just made to please big countries as Germany and France, who make always high budget deficits.

And then there were also the 'targets of Lissabon', to make Europe one of the most competitive continents in the world at 2010. But in March 2005 also this five year old statement had been abandoned. The thing we get in place is that each country will have to make an economic plan by itself, which wil be evaluated each three years. This does certainly not support a fundamental reinforcement of the European economy.

I do agree that there are a lot of economic differences between all the European countries - we see those differences allready here between Flanders and Walloonia - but it's worrisome that the European leaders are too afraid, not to 'adapt', but realy to 'attack' the corporatist social model we know in (continental) Europa.

Those two facts - the abandonances of both Lissabon and the stability agreement - will not contribute to a stabil euro-currency, and that's a worrying and regretable fact.


I may be mistaken here, but aren't most of the people hammering at the Euro and yelling to go back to their own currency doing that for the very reason of being able to "relax" the money supply?

The ECB has done a decent job of keeping inflation in check. So decent that politicians everywhere are "suggesting" that the ECB rather should focus on "growth".