What's RIGHT With the Euro

You read that right. Right.

I think like an economist. The economist always thinks in terms of alternatives. The economist’s mindset was expressed clearly by the late comedian, Henny Youngman. “How’s your wife?” “Compared to what?”

One of the most common complaints against the eurozone is this one: “The eurozone is a central currency, but decentralized national fiscal policies.” I have never seen one of the critics who invoke this argument propose the abolition of the euro and the European Central Bank. This argument is always offered to defend the idea of fiscal union. In other words, there is no push to decentralize the currencies of the eurozone. There is a strong, but so far ineffective, push to unify the fiscal policies of the eurozone.

Think through the implications of this. Can you see what is wrong with this argument?


This argument is inherently Keynesian. It relies on the fallacious idea that national government deficits overcome recessions. A related idea is that government deficits promote economic growth. But all good Keynesians know that national government deficits require monetary inflation in order to sustain them, because without monetary inflation, interest rates will rise in response to the increased deficits. So, the Keynesian argues, because it is necessary that various countries have different degrees of deficit, depending on the business cycle in a particular country, the imposition of a single currency on top of multiple national economic cycles cannot be sustained.

This is all part of the worldview which began no later than the Versailles conference after World War I, in 1919. We have seen one sustained attempt to create a single European state. This single European state is supposed to have a single currency, a single central bank, and a single fiscal policy.

Let us go back to 1914. From the end of the Napoleonic wars in 1815 until the outbreak of World War I in mid-1914, the Western world enjoyed the benefits of an international gold coin standard. There was no centralized monetary policy. There was a single currency that was used in international trade, and in most of the countries involved, there was a domestic gold coin standard. Citizens could go to a bank and demand payment in gold coins in exchange for a domestic currency. This acted as a brake on the expansion of domestic currencies.

What we had during this period was a unified currency and multiple fiscal policies. The central political fact of this unified currency was this: government policies across multiple international borders were not in charge of monetary policy. There were multiple central banks, and in the case of the United States, there was no central bank until 1914. There were multiple national governments, and each government had its own fiscal policy. Yet it was this period of world economic history that experienced the greatest amount of economic growth per capita in history. There was a single currency and multiple fiscal policies.

In the United States today, there is a single currency. There is a single central bank. There are multiple fiscal policies. There are 50 separate fiscal policies at the state level, and there are thousands of fiscal policies at the county, city, and town level. No economist calls for 50 central banks to supply individual currencies in the 50 states. In fact, the United States Constitution prohibits this. It did exist prior to 1788.

So, the eurozone, with its multiple national governments and multiple fiscal policies, has been operating with a single currency and a single central bank for 15 years. All the cries that we hear that say that Europe is hampered, because there are multiple fiscal policies and a single central bank system, are demanding a further centralization of politics in Europe. This is simply the latest version of the program of European political consolidation that Jean Monnet began preaching in 1919.

The problem with Western Europe is not multiple fiscal policies of national governments. The problem is Keynesianism. Keynesianism wants a single fiscal policy for a single integrated political order. It wants the central government to run deficits constantly, and it wants a single central bank to provide sufficient fiat money to buy the IOU’s issued by the single international political union. It wants political consolidation. Keynesianism has always been the economic theory of political centralization.

The international gold standard was not tied to nationalism or political consolidation. It was independent of both. That was its great benefit.

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