By George P. Brockway, originally published June 2, 1997
WELL, IT LOOKS as though Europe’s central bankers have blown it. The rest of us may rejoice. The Socialist victory means that France will no longer try to destroy its economy in order to qualify for admission to the European System of Central Banks, which is supposed to administer the new currency called the euro. And Chancellor Helmut Kohl‘s squabble with the Bundesbank over the valuation of his country’s gold reserve will probably disqualify Germany.
The principal tests each European nation must pass in order to be admitted to the System of Central Banks are that its deficit cannot be more than 3 per cent of its GDP, and its debt cannot be more than
60 per cent of its GDP. The only country now certain to meet the standards is the Grand Duchy of Luxembourg, whose population is 415,870, and whose territory is about 32 miles square.
The announced intention of the deficit and debt tests was to get the national currencies in line so that they could be exchanged, mark for euro, franc for euro, lira for euro, and so on until the local currencies all disappeared in June 2002 (the same magical year that is supposed make our minimal deficit disappear).
I must confess that I don’t ordinarily think like a banker; so the scheme doesn’t much appeal to me. I can understand why the usually strident enthusiasts for a free market have, in this instance, fallen silent. There are several active markets where thousands of shirt-sleeved, hardworking people make money the old fashioned way: They speculate in it. The results of their speculations are regularly published in the financial press, and may (or may not) be used by the friendly concierge at your friendly Paris hotel to decide how many francs and centimes he’ll give you for your American Express Travelers’ checks. These listings, although arrived at with the most invigorating absence of regulation, often have currencies making daily jumps of five or more points against one another, and are far too volatile to be used to establish the value of the euro or anything else.
The problem of a fair exchange among currencies is, however, precisely the sort of problem that the Consumer Price Index was designed to solve. As I’ve said here more than once, the CPI doesn’t really tell us much about the cost of living and never was intended to do so. It does tell how many units of a given currency it takes to buy some selected basket of stuff.
The CPl’s figures report each month the cost in American dollars of an American basketful. The European basket would, of course, be different, but it would be the same all over Europe. During an agreed-on day or week, researchers would fan out over each of the candidate countries with identical baskets. In France they’d calculate how many francs the basket would cost; in Italy how many lira; in Sweden how many ore; in Germany how many marks, und so weiter. It would then be a simple matter to determine how many units of each currency are equal to a Luxembourgeois franc (choosing that standard so the bigger countries wouldn’t be jealous of each other), whereupon the euro could be declared equal to some multiple of the Luxembourgeois franc.
With a soothing whirr of calculators, the job would be done. Everyone would exchange marks and francs and pounds sterling for euros at the appropriate rates, and any bits of the old currencies that were not exchanged would become collectors’ items, like Confederate dollars. Why has Europe instead undertaken a complicated procedure that has caused widespread political uneasiness and distress?
Well, the central bankers were in charge, and the central bankers (unlike the friendly people you deal with) thought they had a chance to force all Europe into compliance with their peculiar notions of how the world should work. The unhappy probability is that most of the citizens of the European nations, like most of the citizens of the United States of America, are too lazy or too befuddled to think for more than a news byte about what is at stake. Willie Sutton was interested in banks because that’s where the money is, and we are in awe of bankers because they’re the people who are where the money is.
The Maastricht Treaty‘s insistence on debt and deficit standards is an indication that more than currency unification was being provided for. As we have seen, currencies can readily be unified without all the mumbo-jumbo. Everyone knows that the mark is stronger than the lira. (At the inauspicious start of a spring day in 1973, President R. M. Nixon said to his chief of staff H. R. Haldeman, “Expletive the lira.”) Once the relative strengths had been established, and both mark and lira had disappeared into the euro, it would no longer matter whether or why one used to be weaker than the other.
If the difference was caused by Italian over-exuberance, as it may have been, Italy can continue to finance such policies by selling bonds denominated in euros and paying interest in euros, just as New York
City sells bonds denominated in dollars and pays interest in dollars. Italy’s post-unification bonds will no doubt be harder to sell than Germany’s, where politics tends to be more dour, and will have to pay a higher interest rate, though both are denominated in euros, just as New York City’s bonds pay a far higher interest rate than Westchester County‘s, though both are denominated in dollars.
The soundness of the dollar does not depend on the soundness of New York City’s financing, and the soundness of the euro will depend not on the debts or deficits of the member states, but on whether the euro is accepted as the only legal tender by unavoidable taxing authorities. The history of the United States is instructive on this point.
The Continental Congress financed the Revolution by paying its soldiers and suppliers with IOUs called Continentals (today we call our IOUs Federal Reserve notes or Treasury bonds and notes). But the Continental Congress had no power to tax; it could only ask the 13 colonies for funds, and the same was true of the government later formed under the Articles of Confederation. Even during the war, “sunshine patriots” of the sort castigated by Tom Paine refused to accept Continentals, and after the War the expression “Not worth a Continental” entered the lexicon. In 1790 Alexander Hamilton persuaded the new Constitutional Congress, which had the power to tax, to assume the war debts, which is another story, a proud (but not altogether happy) one.
In the Europe of the Maastricht Treaty, the low deficit standard for entry into membership would be required for continuing membership, presumably to keep the euro sound. There is, however, neither rational argument nor empirical evidence linking a low deficit with sound money.
The sound money theory is based on the naive and archaic notion that there is a determinate quantity of lendable money, and that a big deficit soaks up part of that money, leaving less for private business. But money is credit, and credit expands as creditable business expands. Financing the explosive growth of the computer industry has not dried up funds for government bonds or home mortgages or any other purpose. Rather the contrary.
In the United States, the conventional mantra is that we must balance the budget in order to get lower interest rates, and we are ripping jagged holes in our social and cultural fabric to that end. Yet in the half century since the Good War, the interest rate went up, not down, in every one of the eight years in which we managed to balance the budget; and deficits and interest rates have gone up or down together only 15 times out of 50.
Nor is there a correlation between deficit and inflation. In every Reagan year the deficit was greater (generally far greater) than in any Carter year; yet in every Reagan year except one the annual change in the CPI was less than in any Carter year.
THE CAPITALIST system as it has developed in the past 150 years is distinguished from all previous systems by the extent and fluidity of borrowing. “Neither a borrower nor a lender be” was the advice of a Renaissance courtier, and not a remarkably successful one. Everyone is excited by the current stock market boom, but even at its present questionable valuation, there is in the stock market less than half as much money as is invested in the personal, corporate and public debt of the nonfinancial sectors of the economy.
Given the tremendous growth of modern capitalism, which (to repeat) is based on borrowing, and given the empirical record that we have sampled, it is difficult to imagine why central bankers (and conventional economists) persist in considering public debt something naughty that must be suppressed. Yet the United States seems determined to regress to a fundamentally mercantilist society by 2002, and Europe has an even more restrictive aim.
If the objective were merely slowing or rationalizing the consumption of the Earth’s natural resources, a case could be made. Nothing so sensible as that is in mind. Instead, roughly the bottom half of society is earmarked to pay the costs of this peculiar unification. All over Europe unemployment is at record heights, and all over Europe nations are scrabbling (as we are scrabbling) to reduce job protection, medical insurance, unemployment benefits, welfare rights, the social safety net, and all sorts of social and cultural amenities.
Europe is in a worse mess than the United States because for 15 years European interest rates have been higher than ours, and European tax systems (heavily dependent on payroll taxes and the value added tax and, incidentally, without a capital gains tax) are less rational than ours. Europe is in more danger from austerity programs than the United States because the new European Central Bank will be more independent and even more arrogant than the Federal Reserve Board.
According to the Maastricht Treaty, “The Community institutions and bodies and the governments of the Member States undertake not to seek to influence the members of the decision-making bodies of the ECB or of the national central banks in the performance of their tasks.”
Put that cozy provision alongside the recent announcement of the Bundesbank (the role model for the European system central banks) that they will not consider Germany’s 11.3 per cent unemployment rate when they establish monetary policy, and you have to hope that the treaty will be thoroughly revised.
No nation, no community of nations, no world of nations can strengthen its economy by keeping people from working. Downsizing and austerity may work for a few self-centered corporations; it is counterproductive for a nation or a community or the world as a whole.
So far it would seem that the principal European leader to understand this simple truth is Michael Dietzsch, head of the German brewers, who recently observed that the sluggishness in his industry is caused by the fact that 4.5 million German beer drinkers are out of work. Would that there were more leaders-including a few American leaders-as clearheaded as he.
The New Leader
 Ed: It’s doubtful that the Greeks feel this way…