An alternative to popular faith
Greece is criticized for secretly borrowing. The fault is not with Greece. The fault is with the euro.
The European Union wants Greece to cut its debt, either by raising taxes, reducing expenditures or both. If Greece does any of the above, it will dive into a depression and pull the other members down with it.
The current situation exposes the fundamental flaw with the euro: It is a gold standard in fancy clothes. Like the gold standard, the euro precludes any member nation from controlling its own finances. The solution to a recession, and indeed, the requirement for economic growth, is government deficit spending. Yet no member of the European Union has the unlimited power to do this. They are restricted by the covenants of the Union.
The grouping of countries under the euro banner is akin to a gold standard, whereby every country is required to peg its currency to a value over which it has no control.
The gold standard failed, and always must fail, because it prevents countries from taking the necessary steps toward economic growth. A growing economy requires a growing supply of money, and deficit spending is the system by which a government increases its money supply.
In 2005, noted economist Professor Randall Wray invited me to speak at the University of Missouri, Kansas City. In this speech I said, “Because of the Euro, no European nation can control its own money supply. The Euro is the worst economic idea since the recession-era, Smoot-Hawley Tariff. The economies of European nations are doomed by the Euro.”
The Euro will fail, just as the gold standard failed, and for the same reason. To attain the modest convenience of easier intra-European trade, the European countries surrendered control over their individual financial destinies. Only a total merger of national governments — a United States of Europe — could make the euro viable.
Rodger Malcolm Mitchell
www.rodgermitchell.com
#Monetary Sovereignty - Mitchell 
Hi Rodger,
When you state the Euro “must fail”, do you have any thoughts on how it will fail? Will countries like Greece sececde from the EU and abandon the Euro? How is this situation different from individual states in the U.S that cannot print their own currency yet the dollar lives on?
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Jack,
Perhaps initially, euro nations will try to help Greece by supplying money, but this will wear thin very quickly, especially when the amount of money needed becomes untenable for voters.
Greece will discover it cannot live with the EU’s financial terms, and either will drop out or be thrown out. As more countries follow Greece’s lead, the EU finally will understand the weakness of the euro system and eliminate the euro as a common currency, while retaining a sort of “most-favored-nation” status for all EU members.
(The fundamental purpose of the euro was to ease intra-European trade, which could, and should, have been done without the euro. It became a tail-wagging-the-dog situation.)
Having a common currency always was unnecessary; the U.S. dollar would do for Europe just as well, without all the problems.
In the U.S., most of the individual states are struggling. Over time, the federal government has, and will continue to, assume more of the states’ financial obligations including health care, pensions, infrastructure and education. It can do this, because it has the unlimited ability to create money — quite different from the EU.
Rodger Malcolm Mitchell
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This is all of course conjecture, but if your scenario plays out, what would individuals holding euros do with their currency when the euro dies? On a related note, this may be why gold continues strong. If I were holding a doomed currency I would be very tempted to convert a portion of that currency into an alternative that can’t be legislated away…
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Jack,
Ironically, you may have answered your own question. In 1933, U.S. citizens were required to exchange their gold for dollars. Ownership of gold was made illegal for everyone except dentists, artists, jewelers and for industrial uses. No contract could specify payment in gold.
Ownership of gold remained illegal (i.e. “legislated away”) until 1974. There is nothing sacred about gold. It is just a mineral. (See the post “Fools Gold”.)
Rodger Malcolm Mitchell
http://www.rodgermitchell.com
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Just curious if you have any philosophical/moral objections to government making an inert mineral illegal. Am not trying to be cute here and surreptitiously argue for a gold standard, but just because it was illegal for Americans to own gold for 50 years doesn’t make it right. In fact, if there is nothing special about gold, if it is not “sacred” as you stated, why make it illegal? It’s a bit of a conundrum, because the very fact that some people believe that gold may be made illegal again is partially where it derives its value and simultaneously feeds the skepticism about fiat money.
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I have no philosophical or moral notions about gold, silver, aluminum or iron. They are metals.
The dollar is backed by the full faith and credit of the U.S. government. Aluminum and iron are backed by their intrinsic value. Silver and gold have minimal intrinsic value, so mostly are backed by the “greater fool” theory.
I’ve not met anyone who believes owning gold will be made illegal again. There’s no reason to. It no longer is the collateral for money. Why would anyone want to make it illegal?
Anyway, remember the famous Clinton mantra, “It’s the economy, stupid”? My own take on gold is, “It’s just a shiny, useless metal, stupid.”
Rodger Malcolm Mitchell
http://www.rodgermitchell.com
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Oddly, the British pound more of a sovereign currency than the Euro (based on your analysis of the Euro above)has been plummeting even a bit faster than the Euro of late. I believe you’ve identified the innate weakness of the Euro, but how to explain the pound?
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The short-term value of a currency is related to many factors, not the least of which is speculative trading. There is a huge short interest on the euro, which believe it or not, is bullish (The shorts will have to buy to fill their positions.) That may account for some of its strength.
The euro is especially complex, because it balances among so many nations. I don’t pay much attention to short term market moves. I suspect the pound has fallen because of recent political problems in England. It actually rose against the euro since last October, and has fallen recently. Meaningless.
Over the long haul, the euro is sick, as is Greece. Because of the euro, Greece has been told to solve its economic problems by raising taxes and cutting spending. What could possibly be worse for a troubled economy?
Rodger Malcolm Mitchell
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