The Euro as the SDR of Europe?
from Steve Keen
The Euro is the national currency of a country that does not exist. Though there is a continent of Europe, as there is of America, there has never been a country of the United States of Europe, and there probably never will be.
The Euro is therefore not a currency as is the American dollar, and yet it is forced to masquerade as one—badly—by the Maastricht Treaty, in which the countries of Europe abandoned the right to produce their own genuine national currencies.
With the volume of the Euro being controlled by a supra-national authority (the ECB), and member states punished for breaching rules on government spending (the 3% maximum deficit and 60% accumulated deficit rules), the Euro is closer in function not to a currency, but to Special Drawing Rights as they were conceived of by Keynes at Bretton Woods. In his plan for a post-WWII international monetary system, Keynes proposed that common supranational currency be used for international trade (the “Bancor“), while domestic currencies should used for internal trade. The exchange rates between national currencies and the Bancor were to be fixed, with persistent trade deficit countries being forced to impose austerity and devalue, while persistent surplus countries were taxed Bancors, and required to stimulate their economies to increase imports.
Keynes’s Plan was scuttled by the USA’s insistence on its “first among equals” status after WWII, leading to the crisis that the global economy is in today. The Euro, with its half-hearted-hybrid structure as a currency that is not a currency, and its punitive rules on (government) deficit nations sans stimulatory rules on (government) surplus nations, has turned that crisis into a catastrophe. Keynes would have railed against idea that the Bancor should also be the currency of national commerce as sheer madness, given his prescient position that “above all, let finance be national”. Yet that is what the Euro attempts to be.
Some see the way out of today’s catastrophe as creating what does not exist—the United States of Europe. But if that were ever a possibility, it is far less one after the damage done by Maastricht, and the Franco-German insistence on austerity for the periphery in this crisis. However what is a possibility—and which has echoes in some of the contributions here (such as “Nau” proposal from Gerald Holtham)—is to move the Euro closer to a continental version of Special Drawing Rights.
The Euro could be the currency of inter-European and international trade, while “sub-Euros” created by each of the nations of Europe could be used for domestic trade and, importantly, domestic financial arrangements. The disciplinary aspects of Maastricht—which are currently inappropriately directed at government deficits and are amplifying the downturn—would then be redirected at trade deficits within Europe instead (and matched by pressures to minimize intra-European trade surpluses as well).
The Euro-Drachma, Euro-Peso and Euro-Mark could be introduced at one-to-one parity with the Euro, and all financial assets and liabilities would be denominated in these national currencies rather than the Euro. These national currencies would then float freely for a period (say one year), after which they would be fixed in proportion to the Euro.
The obvious devaluation that would occur for the Euro-Drachma and Euro-Peseta would reduce their foreign debts—and force the nations whose banks over-lent to them to deal with the consequences. It would also end the currency flight that is currently occurring: a Euro-drachma would still be a Euro-Drachma, whether it resided in a Greek or German bank account.
The introduction of such a system could provide a rapid resolution to the current crisis. It could not be pain free, but it would be difficult to imagine that it would impose more pain than is currently being felt by Greece and Spain, or is about to be felt by other countries once the contagion passes on to them.
This system would also introduce what is otherwise impossible in the Euro: exchange-rate flexibility. Economists as widely apart ideologically as Wynne Godley and Milton Friedman observed long before the Euro began that it would fail (a) because it imagined that a market economy would reach a harmonious equilibrium on its own without government intervention—which Godley correctly characterized as a deluded neoclassical fantasy; and (b) because it pushed together widely disparate nations which Friedman noted were utterly unsuited to a currency union.
A step backwards by Europe from dystopian fantastical object of a single currency, to a mini-version of what Bretton Woods should have been, could thus be a workable way out of this crisis and towards the political dream of a non-fractious Europe.
This post originated in a request that I contribute to a debate on the Euro at Open Democracy in response to George Soros’s proposals and his observation that there were just 3 months left to save the Euro.
The solution you provide is not bold enough; it is typical of the Anglo-Saxon world that never looks on Europe as more than a market for commercial activity. Why not make a federal United States of Europe, a state like the USA? Unitary striving are as much a part of moderrn European history as resistance to them. France in the 18th century had no common currency or common markets; the franc and the national tax system expressed the impulse of unification just as the 19th century creation of the Customs Union (the Zollverein) presaged the federal German Empire. The unifiication through which Europe seeks to preserve its great civilization draws upon the same source. So be bold Professor Keen and give us the minimalist solution to the Euro crisis if you please, but also set out the maximalists steps that you thiink are necessary in order to create a solid economic base for a Federal United States of Europe. Give us both options.
Here I’m with Steve and very much against you, Robert. Historically, the consequence of the Anglo-Saxon world looking on Europe in the way it looks at itself has been for them to misunderstand the cooperative vision of the EEC and from the beginning seek an exploitable EU in their own image and likeness. Just look at what that is!
Countries like Britain and the US have been spoiled from end to end by wholesale desecration, their internal communities abandoned when fashions change or local resources have been extracted, and that wealth dissipated in gross inequality engineered largely by bubble-blowing and war: adding insult to poverty, moral corruption to waste and the buying of power to ensuring more of the same. The game is just at an earlier stage in resource-rich Australia and a later stage in some of the more vulnerable areas of the world.
That may be what you wish to see as an Anglo in Europe, Robert, but it is intelligent voluntary cooperation (without enforcement of political union via fraudulent economics) that was envisaged in Keynes’ era and which I, as a caring member of a world-wide community, still wish to see. What Professor Keen is proposing seems to me about right to achieve that, though I would go further, regularise the role of banks as accountants for (not owners of) other people’s debt, and authorise/account for credit usage locally too.
I really am puzzled with your response to my post. It is so anti-European. You attack US and the UK for their desecration of the world, and then you say that the European vision of a European commjunity is some sort of enforcement of political union through fraudulent economics. No doubt the current situation could be called fraudulent economics, but I did not suggest that we accept the status quo, I only suggested that Keen replace the fradualent econoomics with an economics that would permit unification.I have fought for European union since I first came to France in 1956, so anything short of that unification is failure to me. I think the UK had a great opportunity right after World War II to place itself at the head of Europe in the fight for European unification. But the little Englanders and advocates of the special US UK relationship won the day. And Britiain turned its back on Europe, Keynes notwithstanding. Europeans will have to figure it out for themselves and they will; they are very capable people. Look at Fulbrooks statistical comparison in the Decline of the USA series and you’ll see that continental Europe rates above the US and the UK in almost every category. It’s a a healthy corrective to the negative stream of comment that comes out of the UK and the US, for France, Spain, Italy, and often Greece, rate high in their achhievements. . .
Unification is not necessarily union American style, and my gripe is not anti-European or even anti “the European vision of an Economic Community”, it is against the perversion of that vision into a UK/US style one-size-fits-all government from a physically and mentally remote centre, empowered and corrupted by dishonest centralised banking with unpatriotic ambitions, that I wouldn’t wish on anyone, and which intelligent people in Scotland (and, I hear, Vermont) would very much like to opt out of. Not from the British family or Commonwealth of nations or from the European Community, but INTO local grown-up financial autonomy and self-government within what were originally conceived as united FAMILIES of nations. De Gaulle saw the European vision of that type of unification being perverted if Britain joined it, and tried to keep us out. Britain got in and Europe – not Britain – got the Euro. You cannot have the argument both ways, Robert. If economic union is necessary to achieve Anglo-style political union, subsidiarity in banking is necessary to NOT achieve it.
“… unpatriotic ambitions…”.
Hence, “Where has all the surplus gone”?
SDR’s are a way for the Financial system to remain elitist and dominating. I’d rather see not only the economic, financial and monetary systems, but ALL of Humanity’s systems…..serve Man instead of making Man serve them.
While the suggestion by Keen sounds plausible (same as using new Drachmas for domestic purposes etc), it is perhaps incomplete in so far as banking and the intermediation role is concerned. Left untouched, the current banking model is not only incompatible with any fair market system but inherently anti-developmental and thus poses great challenges for any future stability of markets or economies, of the EU as well.
I don’t even think credit creation should be left to the private banks alone in any new dispensation in the EU.
I thought you are a scientist Dave, observation, hypothesis, then renewed observation to verify. You don’t know a thing about what I do and think and yet you hypothesize wildly about it in this post. I think Professor Keen is a pretty smart guy, so I simply asked him what we needed to do in order to bring about unification in Europe, because some of us want unification, not a system like we have now under the thumb of British and US finnancial institutions (Goldman Sachs), US rating firms, and investment speeculators. I was dismayed when I saw US UK investoor capitalism take over European banking in the 1990s and said so in numerous places in my writing. But I don’t think Keen’s solution would stop that, it would probably just make the British and American manupulation easier. But what do I know, that is why I asked Keen.
Let’s do some observation, why would Robert Locke retire from Hawaii and move to Goerlitz, Germany. Could it be that Hawaii is some horrible place to live. No! Could it be that he had become an agent of Goldman Sachs and US investor capitalism. Again, no! Read his books. Or might it be that he was sick of living in the US, like people in Vermont, liked European civilization very much, and found the little town of Goerlitz Germany a special place to live. Yes! Come visit Goerlitz to verify and stay in my Vacation apartment complex. goerlitzluxuryvacationrental.com
Dave, just because I am an American don’t assume that I am an agent of the sort of America you detest. I left that America long ago and certainly do not wish to see it imported here. But I also know, from a liifetime studying and teaching European history that Europe is better off with its big states incorporated into a democratic political union organized on the grounds of what the Germans call a social market economy. And Europe in my opinion needs this political union in order to escape the embrace of US-UK investor capitalism.
Robert, I’ll accept that I don’t know a thing about what you do professionally, yet I can recognise ad hominem argument when I see it. We are both human, with different strengths and weaknesses and types of failure of imagination.
I see you not “seeing” what I am saying, so not seeing that my argument is not against unification but about TYPES of unification and that what you saw in the past – not what is happening now – is much more nearly what I want to see in the future (though I would like states world wide to be not big enough to go to war.
Last night a BBC2 TV history programme on the formation of the United Kingdom brought home to me how even as a visual thinker I cannot imagine events I have not previously heard of. (How Cromwell, having won his war, proceeded to slaughter defenceless opponents in all four kingdoms and a previously independent Cornwall).
So you are an American, not a Brit! I should have guessed from the middle initial in your name. But hey, this is what discussion is all about! Without a hypothesis one has nothing to falsify or verify! And let me admit that when the Euro was first proposed, I was enthusiastic about it. I saw it as not only convenient but as a way of stopping money changers ripping us off with commissions and/or rigged exchange rates every time we wished to trade internationally. Remaining open to observation, however, I see that, in practice, that previous “retail” rip-off has simple been replaced by a wholesale rip-off, and that the problem is (figuratively speaking) not only crooks in the Bank of England but also idiots killing off the Golden Geese by stashing away their Golden Eggs in Swiss bank accounts. And having said that, I can now see a connection between Bacon’s science creating new types of livelihoods for the unemployed and fictitious money enabling them to be employed building stately homes [if instead of churches]. The problem is not that mechanism, so much as the likes of Ricardo economising on their worker’s wages.
Can’t argue with much of what you say. But still I thiink of the retention of the Euro as the only possible way of stopping British and US financial capitalism taking over Europe. They did a good job of doing it in the 1990s when they took over the financial investment business on the Continent. Then they did themselves in with the sub-prime (2007) and GF Crises, only to be reprived by the soverign debt-Euro crisis which the Gnomes of London manufactured. Because we still have a srong democrfatic left in Europe, it might be able to stop austerity (which is a stupid policy economically), default on the debt and carry through a policy of expansion under the democratic left (Hollande) and save the social market economy It is a long shot but I have no faith at all in a Europe dominated by US and UK capitalism and their European allies in Merkel’s circle, being overthrown by the forces of democracy in the US or tthe UK. It’s either the Europan social democrats in an expansionist Euro zone, or nothing. .That’s why I asked Keen the question.
So I’m for the retention of the Euro, but ALONGSIDE (to put it parochially) the Scots pound [crown?] and Malvern pence. Unless the people of little places like Malvern have livelihoods independent of even county council taxation, even national banks, even international supermarket chains never mind immortal corporations, there will remain no force in even social democratic democracy to keep out the enslavement of mankind by financial empire-builders whose minds have succumbed to the cancer of self-importance. Clever lies can only be defeated by intelligence aware of the need to re-establish truth, and not preoccupied with scratching a living. So I’m not talking about tearing down buildings, I’m talking about using them as “homes for public service” by the local public. For example, supermarket builders have earned their livings building them and had their reward in that people prefer to shop in them; but it is entirely feasible for those who work in them to “own” and operate them with largely automated finance and expert advice from specialists in functional and community management. That’s the sort of outcome I’d like to see, and reverse engineering it to get the “maximalist” steps you asked Professor Keen to spell out, I came down to telling the truth about what money now is, building a Copernican consensus on the interpretation of it as representing potential debt (meaning those who have more owe the rest of us more), and thereby re-establishing the principle that Good Pope called “the reciprocity of rights and duties”: from those who have more, more will be expected.
I read your contributions with great respect and interest, Robert, but sometimes feel we are arguing about words, or rather, having agreed on the choice of words, find I am arguing with what seems to be the meaning you attach to them. Right at the beginning here, I could accept your hope of seeing a Federal United States of Europe. What I vehemently disagreed with was your qualification of that: “a state like the USA?” As it is now? No way. The devil there is in the detail, influencing the detail through hypnotic deception by way of money appearing to be valuable and apparently no options but “either/or”.
Oh dear! The symmetry of my Copernican consensus was no excuse for my not saying “those who have more” IN REAL TERMS, and the Good Pope was of course Good Pope John. I should also have said how much I enjoyed your “Gnomes of London” and hoped your “long shot” succeeds.
I hope we can agree that Ken Zimmerman (on “Sandy Weill said what?”) captured the significance of this discussion too:
“Not to be trite, but one of the greatest American philosophers summed it up, ‘If you don’t know where you are going, you might wind up someplace else.’ (Yogi Berra)”
We really don’t disagree very much but we have a slightly different take on things, which might originate in the difference between American and British experience. In America, localism (states rights) is seldom a progressive force. Albraham Lincoln was a staunch federalist, who used the power of the central government to fight for human rights and end slaverry, against the States-right slave-holding South. Ironically, today’s Republican Party is now rooted in the former Slave holdiing states and it has fought mightily to oppose ending apartheid in America; it is not an accident that Lincoln is no longer mentioned by Republicans. The great expanse of Republican America, what the New Yorkers call “Fly-Over America” on their way to the West Coast, is not composed of quaint old towns. The railroads built them as prefab communities, hauled on boxcars and put down every few miles, in rapid construction at intervals as railroad builders extended their track. That is why most of small down America out West looks the same. And ugly/ And they do not stand for anything like protecting the environment or the forests; these Republican bastions; they are allies of the bankers and brokers on Wall Street, who are despoiling the land and the welfare state created by the Federal Government. So I can’t share your enthusism for localism in the US. In Britain devolution perhaps is different.