Mitchell’s laws: The more budgets are cut and taxes inceased, the weaker an economy becomes. To survive long term, a monetarily non-sovereign government must have a positive balance of payments. Austerity = poverty and leads to civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
In a June 5th, 2005 talk at the University of Missouri, Kansas City (the home to the best economics department in America), I said, “Because of the Euro, no euro 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.”
That was an easy call, though I don’t remember anyone making it at the time. The euro nations were monetarily non-sovereign, which meant that in order to survive long term, they all had to have positive trade balances. What was the likelihood of that?
Now comes this article in Time online magazine, “4 Ways the Euro Could Fail,” which discusses how (not if) the euro nations will try to escape from their folly in giving up their Monetary Sovereignty.
4 Ways the Euro Could Fail
All courses of action appear to lead to an eventual financial crisis of some sort. But moderate progrowth policies are the best bet to minimize the damage
By MICHAEL SIVY, May 2, 2012 |
The euro will not die overnight, but it seems increasingly unlikely that the common currency will survive in its present form. European countries and international financial institutions insist that they still expect the euro zone to remain intact, but they are already preparing contingency plans for some sort of breakup.
No one knows, of course, precisely when a fatal euro-zone crisis will occur or exactly what might trigger it. Basically, there are four scenarios, listed here from most to least likely in the short run:
France and other countries persuade Germany to agree to progrowth policies.
Germany has consistently been the strongest advocate of restructuring and austerity as the key to solving Europe’s financial problems.
Germany has survived by having a positive balance of trade. But part of the euro’s initial allure was its facilitation of intra-Europe trade. When euro nations trade with each other, mathematics dictates they all can’t have a positive trade balance. Thus, from the start, there were two opposing incompatible concepts: Easy intra-Europe trade and each nation having a positive trade balance.
The surrender of Monetary Sovereignty plus the need for everyone to export more than they import, doomed the euro as a viable concept.
But one by one, Germany’s economic allies are running into political resistance to those policies. The collapse of the Dutch government has made it difficult for that country to meet its budget targets. And in France, Socialist François Hollande is very likely to win Sunday’s presidential election. He has been calling for more progrowth policies, which has provoked consternation in Germany.
But the balance in Europe has shifted, and Germany may have no choice but to go along with more spending — and more borrowing — by national governments.
In the short run, that would help Europe’s economies by reducing unemployment and limiting the severity of any recessions. But additional borrowing will also contribute to the debt load that governments have to carry.
The fact that it is possible to have more spending without more borrowing, (via Monetary Sovereignty), has not yet occurred to them.
Austerity policies force most of Europe into recession.
Germany may pay lip service to the importance of economic growth but continue to promote austerity. Trouble is, a dozen European countries are now in an economic downturn, including Spain, which officially went into recession earlier this week.
Recession is mandatory for nations that cut spending and or raise taxes (i.e. austerity). If only the U.S. politicians understood this.
In the long run, financially troubled countries need to trim their spending, raise taxes, bring down their labor costs and limit their borrowing. But cutting so fast that a country goes into recession can actually make it harder to reduce debt as a percentage of GDP — because the GDP is shrinking.
No, financially troubled nations need to increase spending and cut taxes — in both the long and short run — to increase GDP.
The weakest countries get pushed out of the euro zone one by one.
If everything continues on present course, then the weakest euro-zone countries will have to offer higher and higher interest rates to sell their bonds, and eventually they will no longer be able to afford to stay in the euro. Greece would probably go first, which would fuel speculation about Portugal, Spain and even Italy. In turn, that would likely push interest rates even higher for those countries, creating a vicious circle.
At which time the weakest countries, having switched to their own sovereign currencies and become Monetarily Sovereign, now will become the strongest countries. They will be able to increase their money supply at will, something the others can’t.
. . . after countries left, they would be able to set their economies on a course for recovery. Argentina, which had tied its currency to the dollar in the early 1990s, suffered a major recession after it devalued its currency in 2001. But by 2003, its economy was booming again.
Tying one currency to another is defacto monetary non-sovereignty. Argentina saw the light.
The euro zone splits into two separate currency areas.
The most rational solution — but the least likely for political reasons — would be for Germany and a few allies, such as the Netherlands, to leave the euro zone and create their own new currency. The euro would remain the currency of the southern European countries and could be devalued, easing the pressure on them.
Rather than one group of monetarily non-sovereign nations, there would be two. This is an improvement??
Bottom line, the euro nations belatedly realize the euro is a failed concept, but they don’t know why. They believe they can tweak it to extend its life, but what they propose is like prescribing aspirin for cancer. The fundamental problems remain.
There are two, and only two, long-term solutions for the euro nations:
1. Leave the euro, adopt your own sovereign currencies, becoming Monetarily Sovereign
2. Merge into a republic, forming the monetary version of a United States of Europe, so that the EU provides to euros to all members, as needed.
Rodger Malcolm Mitchell
No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports