© Richard Timberlake
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The European monetary system under the Euro is a bureaucrat-made substitute for the Gold Standard. The Euro is analogous to "gold" and all the other currencies are based on it. If the Deutsch-mark were to become an independent currency again, it would supplant the Euro and become the new quasi-gold currency. Such maneuverings would not save the Euro or the Eurozone. Far better to start over with a true Gold Standard. Under a gold standard each politically separate country MUST manage its affairs so as to keep its currency redeemable in gold at the fixed price. If it does not do so, it faces severe opprobrium in its fiscal and monetary operations. The Undesigned Order of thousands of people in hundreds of markets making millions of decisions forces the system to be stable. So Germany would not need to worry about Spain, or any other such country.
Fundamentally, of course, the political entities (i.e., "countries") of Europe, as well as most of the rest of the world, have promised their political constituents welfare programs and other costly benefits that they cannot afford. The bill is coming due and must be paid one way or another. One way is for the various welfare states under pressure to scale back their welfare programs to what each country can afford. If each one did so, the situation would be stabilized but not solved, because all of these governments have outstanding lots and lots of long-term debt on which they must pay interest.
If they do not, (another option) they default, the value of the debts goes to zero, and they must reduce the scope and benefits of their welfare systems anyway. A third option is for the political agencies in the governments of these debtor countries to start printing money. Here is the similarity to the German position after WW I in 1922-1923. The debtor government simply prints up its legal tender currency and pays off its creditors, including its welfare liabilities, in paper currency. To pay its foreign debts, it buys Euros with the "new" legal tender currency and pays off. Of course, very quickly all domestic prices and foreign exchange rates go through the roof, but the debtor "sovereign" government has paid off its contractual debts.
Thus, three options face these debt-swamped countries.
1. Get the fiscal house in order and scale back welfare to what is currently feasible, and also adjust retirement benefits accordingly.
2. Develop a Gold Standard system and let each country join in to show its fiscal responsibility.
3. Inflate the currency so that the real values of the welfare debts are scaled down to what the productivity of the country will allow.
Both options (1) and (3) reduce the real value of the governments' promises: one does it by agreement and the other by inflation.
From the various news reports over the last few weeks, it looks as though the inflationary option is the only one that the various welfare-conditioned populations will permit.
Moving to a Deutsch-mark base will not save the Eurozone's monetary system. If the German government bails out the welfare-debtor countries, it will lose the approval of the German people. It will be tantamount to telling the German worker that he must pay the bills for the Greek or Spanish or Italian retiree who is lounging on an island retreat.
"Austerity measures" are a misused term. What is needed is government austerity, where the governments scale back to a much diminished size and, as well, scale back the programs they have been promoting to keep themselves in office. "Austerity" is the answer, but it must be a government austerity. I should add that the same arguments apply to the United States and most other countries that have embraced welfarism, socialized medicine, and every other fiscal sin imaginable.
I do not have any outlook for the Eurozone economy other than what I have written above. I just read a proposal by the President of the Banque of France in the Wall Street Journal (June 12, 2012) that seeks relief by putting more and more of the economic decisions of European countries into more strait-jackets--regimenting their fiscal and monetary agencies, and adding to the bureaucracies that have made the problems so irresolvable in the first place. With such opinions from such influential people, I would not presume that the European countries are going to find any solutions or solace.
I might add that the political agreements in Europe should come after economic institutions have established free markets and free trade.