Re: The make believe world of eurozone rules

Patrick Barron

There has been much unscientific economic pronouncements about Greece’s financial problems and especially how to solve them. Below is a short list of three of these economic fallacies.

1. The euro is too strong a currency for Greece.

This statement usually is accompanied by a reference to Greek productivity being lower than that of the northern tier EU countries. The logic, such as it is, states that the euro is not a suitable currency for countries with vastly different levels of productivity. This is followed by a recommendation that Greece leave the European Monetary Union and reinstate the drachma. The National Bank of Greece then would set a very low exchange rate between the drachma and the euro, making Greek products more competitive.

Well, there is a semester’s worth of economic fallacies embedded in this chain of logic. A currency is an indirect medium of exchange. Two countries with different levels of productivity can use the same medium of exchange just as two individuals can do so. You may pay the kid next door to mow your lawn with dollars that you earned in a highly skilled and highly compensated profession. Yet you both use dollars. There is no reason that the Greeks and the Germans cannot use the same currency. In the age of the gold standard, national currencies were defined by their exchange rates to gold and were redeemable in specie; therefore, in effect, all countries were using the same currency– gold.

2. Debasing the currency will help the Greeks export their way to recovery.

Correlated to the above fallacy is the notion that debasing the currency will aid the Greek economy by the stimulative effects of an increase in exports. The idea is that the Greeks can give more drachma for the currency of its trading partners, making Greek exports cheaper in terms of the foreign currency. Increased exports will stimulate the entire economy. But currency debasement merely causes a transfer of wealth within the monopolized currency zone. The Cantillon Effect tells us that the early receivers of the newly printed money benefit by their ability to purchase resources at existing prices. The losers are those furthest removed from the initial increase in spending, such as pensioners. They will find that their money doesn’t buy as much, due to price increases that are an inevitable consequence of an increase in money spending. Eventually the exporters find that the cost of their resources has risen, at which point they demand another round of money debasement in order to prop up foreign sales and avoid business losses. They will be forced to pay more for their factors of production and must raise prices in local currency terms. In order to avoid losing sales they need their foreign buyers to receive more local currency so that their goods do not increase in price in foreign currency terms. This policy masks real structural problems. It is not a currency problem.

3. Instituting one’s own currency will enable government to avoid unpopular spending cuts.

In other words, debasing the currency is a way avoid the dreaded austerity monster. Governments would have the people believe that there are sufficient real resources to redistribute from the wealthy to alleviate all poverty. It is assumed that the wealthy have nefariously confiscated the people’s wealth, and redistributing it along socialist lines will result in plenty for all. The socialist “plenty for all” slogan has been around a long time and has yet to prove its worth in alleviating poverty.

The Greeks (and Europe) Need Monetary Freedom

In conclusion, too much of the commentary about the Greek crisis has focused on whether or not Greece should drop the euro and not enough on the structural problems arising out of decades of socialism. The Greek government has borrowed more money than the Greek people can possibly repay. Debased money will not make this fact disappear and, on the contrary, will cause even more harm. It is telling that in poll after poll the Greeks themselves show that, although they do not desire austerity, they also do not wish to abandon the euro. They know that such a move will allow the government to destroy what little wealth remains in the country. The Greeks see the euro, with all its flaws, to be superior to a reinstated drachma. The best alternative for Greece right now is to abolish legal tender laws, which would allow the Greek people to trade in whatever currencies they deem most desirable. The Greek government may be forced to default on its euro loans. It is hard to imagine what good can come from another bailout just as it is hard to imagine what good can come from harnessing the Greek people to the yoke of high taxes. The Greek government itself responded rationally to the structure of the European Union and the European Monetary Union. It borrowed heavily at low rates of interest from willing lenders. It accepted all the newly printed euros so eagerly offered by these flawed organizations’ various funds. It is not the only country to do so, merely the first in which the adverse consequences of the EU’s flawed structure became apparent. There will be others and the adverse consequences will be greater. What is important now is that Europe stop destroying its capital base in pursuit of a socialist dream that has become a nightmare.

Patrick Barron

An excerpt from today’s Open Europe news summary:

Luc Coene, a member of the ECB’s supervisory board and a former Belgian Central Bank Governor, told Belgian daily De Tijd that a Grexit may have been a better option, arguing, “Because of the depreciation of the currency, one can achieve more through increased exports in a less painful manner.”

From today’s Open Europe news summary:

William Hague: Greek crisis could be only the beginning

Writing in The Daily Telegraph, former UK Foreign Secretary William Hague argues that “this is not just about one country. It is in Greece that the fundamental tensions created by a single currency have first broken through, because Greece is a particularly indebted and less competitive country. But the same tensions will ultimately surface in other nations facing a less immediate crisis but a similar prognosis.” He adds, “There is a clear risk that the economic performance of the south will diverge from, not converge with, the north. Unless this is averted in the coming years, it will bring problems to Europe for which Greece has only been a minor rehearsal.” His comments resonate with an op-ed written by Open Europe Co-Director Stephen Booth for The Daily Telegraph last week, in which he argues that the Greek crisis shows the need to redefine ‘ever closer union.’

Source: The Daily Telegraph: Hague Open Europe: Booth

Patrick Barron: The Greek Crisis and the Impossibility of the Euro

Published on Jul 2, 2015

Jeff Deist and Patrick Barron discuss European integration, which pits creditor nations like Germany against hapless debtors like Greece under the yoke of the Eurozone. With the Euro operating as a political project rather than a real currency, spendthrifts like Greece chronically find themselves unable to service debt. Greece, says Patrick, represents an example of Say’s Law in action and a clear refutation of Keynes’s belief that creating artificial demand via cheap credit stimulates production.

Think Greece can’t happen here? Look no further than California, with its public pension crisis and huge debts.

If you’re looking for a sober and hard-hitting analysis of what’s really at issue in Greece, stay tuned for a great discussion with Patrick Barron.

https://www.youtube.com/watch?v=h5g9i9Y_mqs

https://mises.org/library/patrick-barron-greek-crisis-and-impossibility-euro

http://www.stitcher.com/podcast/mises-weekends/e/39588738?autoplay=true

Greece cannot pay its debts…ever. Nor can several other members of the European Union. That’s why Europe’s elite are loath to place Greece in default. If Greece is allowed to abrogate its debts, why should any of the other debtor members of the EU pay up? The financial consequences of massive default by most of the EU members is hard to predict, but it won’t be pretty. Europe has built a financial house of cards, and the slightest loss of confidence will bring it crashing down.

The tragedy of Europe has socialism at its core. Europe has flirted with socialism since the late nineteenth century. Nineteenth century Bismarckian socialism produced two world wars. Leninist socialism slaughtered and enslaved hundreds of millions until it collapsed, mercifully without a third world war. Yet, not to be deterred, in the ashes of World War II Europe’s socialists embarked on a new socialist dream. If socialism fails in one country, perhaps it will succeed if all of Europe joined a supranational socialist organization. Oh, they don’t call what has evolved from this dream “socialism”, but it is socialism nonetheless.

Socialism will not work, whether in one country, a multi-state region such as Europe, or the entire world. Ludwig von Mises explained that socialism is not an alternative economic system. It is a program for consumption. It tells us nothing about economic production. Since each man’s production must be distributed to all of mankind, there is no economic incentive to produce anything, although there may be the incentive of coercion and threats of violence. Conversely, free market capitalism is an economic system of production, whereby each man owns the product of his own labors and, therefore, has great economic incentives to produce both for himself, his family, and as surplus goods to trade for the surplus product of others. Even under life and death threats neither the socialist worker nor his overseer would know what to produce, how to produce it, or in what quantities and qualities. These economic cues are the product of free market capitalism and money prices.

Under capitalism man specializes to produce trade goods for the product of others. This is just one way to state Say’s Law; i.e., that production precedes consumption and that production itself creates demand. For example, a farmer may grow some corn for his family to consume or to feed to his own livestock, but he sells most of his corn on the market in exchange for money with which to buy all the many other necessities and luxuries of life. His corn crop IS his demand and money is simply the indirect medium of exchange.

Keynes attempted to deny Say’s Law, claiming that demand itself, created artificially by central bank money printing, would spur production. He attempted, illogically and unsuccessfully, to place consumption ahead of production. To this day Keynes is very popular with spendthrift politicians, to whom he bestowed a moral imperative to spend money that they did not have.

We see the result of one hundred and fifty years of European socialism playing out in grand style in Greece today. The producing countries are beginning to realize that they have been robbed by the EU’s socialist guarantee that no nation will be allowed to default on its bonds. Greece merely accepted this guarantee at face value and spent itself into national bankruptcy. Other EU nations are not far behind. It’s time to give free market capitalism and sound money a chance: it’s worked every time it’s been tried.

Patrick Barron

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