–The solution for France and the other Monetarily Non-Sovereign Governements (MNSGs)

The debt hawks are to economics as the creationists are to biology.

(Reuters- 10/13/10) – French unions voted on Wednesday to extend a rail strike and blockaded supplies from oil refineries and the country’s largest fuel port, but the government stood firm on its pension reform plans . . .I’m not denying there were a lot of people in the streets but at the same time what can we do? Not reform the pension system?” Labour Minister Eric Woerth told RTL radio.

France is in deep trouble. As a monetarily non-sovereign government (MNSG), it cannot afford to pay the generous pensions with which previous politicians bought votes. So look for one or both of two events: The unions will surrender, in which case more than a million people will not receive the pensions they had planned for — a national calamity. Or the nation will have to steal money from other sources – health care, roads, the military and all the other places the French government spends money. This later step would deprive hundreds of thousands of French citizens of their jobs — also a national calamity.

In either case, France is doomed, unless – unless the EU comes to its senses and realizes MNSGs cannot survive on taxes alone. Not being able to create unlimited money (as the U.S. and other monetarily sovereign nations can), the EU nations must have money coming in from outside, either through exports or support from the EU itself.

I predicted this problem back in June 5, 2005, in a speech to the University of Missouri, Kansas City, when 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.”

Why are MNSGs unable to survive on taxes alone? Primarily because of inflation, and secondarily because of imports. MNSGs pay bills with tax money, so with no imports or exports, the same money recirculates within the nation. But, each year, inflation makes that money worth less in buying power, so over time, the nation is impoverished. If the nation’s imports exceed its exports, money leaves the nation, which exacerbates the problem.

Germany, a MNSG survives because it has significant exports – a positive balance of trade – which overcomes the negative effect of inflation. But mathematically, all nations cannot have a positive balance of trade. And those MNSGs that do not, must suffer.

I should mention again that the U.S. does not need a positive balance of trade, as being monetarily sovereign, it can pay any debt of any size, any time. But the EU nations (except for the UK, which wisely held on to the pound sterling), all are in deep trouble, unless the EU itself changes the rules, and provides euros to its member nations, not by lending but by giving.

And that is what I think will happen.

Rodger Malcolm Mitchell

No nation can tax itself into prosperity

10 thoughts on “–The solution for France and the other Monetarily Non-Sovereign Governements (MNSGs)

  1. Ralph, I am one of those that thinks the EMU was ill-conceived and will come apart, taking the euro with it. It is a matter of time. The EZ will realize this and lobby for the creation of an new international monetary arrangement based on some variation of the bancor. The US will not cede monetary sovereignty, however, so that is probably doomed. If it would happen, it is likely doomed anyway, since an international board of technocrats could never manage it, considering global asymmetries. It wil be interesting to see how this shakes out, although quite unpleasant, I suspect.


  2. Tom,

    A Rube Goldberg machine is a device that uses a complex process to perform a relatively simple act. In that sense, the euro is a Rube Goldberg machine, designed to facilitate a simple process — trade among European nations. The bancor is just a great, big euro.

    If using more than one type of money is too confusing for European nations, they should have created a mutually acceptable money like the euro, but allowed each nation to determine the exchange rate with its own monetarily sovereign money. This essentially is the way monetarily sovereign nations function, now.

    In fact, that may be one of the two solutions to the EU problem, the other being for the EU itself to supply each nation with all the euros that nation wants (i.e. functionally making each nation monetarily sovereign).

    I suspect the bias against monetary sovereignty stems from the inflation dread that Europe still carries from WWII. They feel that by limiting money creation, they prevent inflation, which partially is true. Unfortunately, it leads to bankruptcy, which I feel is a more serious threat.

    And of course, all of this is just a substitute for a return to a gold standard, which always is adopted for the same reason (inflation) and always fails for the same reason (solvency).

    Rodger Malcolm Mitchell

    By the way, who is Ralph?


  3. Sorry, Rodger. Senior moment. I was thinking of Ralph Musgrave, I guess, a comment of whose I had been reading over at bilbo.


  4. Latest news from France: “Paris, France (CNN) — France entered a fifth day of nationwide strikes Saturday as tens of thousands of protesters took to the streets, rallying against a government proposal to raise the national retirement age to 62.”

    And all this because France surrendered its single most valuable asset: Its monetary sovereignty–without even a fight.

    Rodger Malcolm Mitchell


  5. By the Irish government issuing them and spending them.

    Issue at 100 Euros to 100 Euro bond, spend 100 euros. If the market for bonds drops below parity then Irish entity will swap 89 Euros (or whatever) for a 100 euro bond to settle their tax bill. More Euros for the Irish – simple arbitrage.

    The rest of Europe would pile in due to the implicit floor on the bond. Speculators always love an instrument with no downside.

    Very likely over time the Irish will start to swap the bonds directly and cut out the intermediate Euro exchange.

    It’s a currency.


  6. Doesn’t the ECB “create” more euros each year, just like the US? And if so, on the whole, doesn’t this address the problem of an individual government’s sovereignty – just like an individual US State?


  7. Indeed, the PIIGS are monetarily non-sovereign, exactly like U.S. states, of which the vast majority are in serious financial difficulty. The problem is the same: The EU doesn’t give enough euros to the euro nations and the federal government doesn’t give enough dollars to the U.S. states.

    Rodger Malcolm Mitchell


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s