The Euro – A Fatal Conceit

Imagine that the euro had never been introduced and we instead had had freely floating European currencies and each country would have been free to choose their own monetary policy and fiscal policy.

Some countries would have been doing well; others would have been doing bad, but do you seriously think that we would had a crisis as deep as what we have seen over the past seven years in Europe?

Do you think Greek GDP would have dropped 30%?

Do you think Finland would have seen a bigger accumulated drop in GDP than during the Great Depression and during the banking crisis of 1990s?

Do you think that European taxpayers would have had to pour billions of euros into bailing out Southern European and Eastern European governments? And German and French banks! (I elaborate on this here.)

Do you think that Europe would have been as disunited as we are seeing it now?

Do you think we would have seen the kind of hostilities among European nations as we are seeing now?

Do you think we would have seen the rise of political parties like Golden Dawn and Syriza in Greece or Podemos in Spain?

Do you think anti-immigrant sentiment and protectionist ideas would have been rising across Europe to the extent it has?

Do you think that the European banking sector would have been quasi paralyzed for seven years?

And most importantly do you think we would have had 23 million unemployed Europeans?

The answer to all of these questions is NO!

We would have been much better off without the euro. The euro is a major economic, financial, political and social fiasco.

It is disgusting and I blame the politicians of Europe and the Eurocrats for this and I blame the economists who failed to speak out against the dangers of introducing the euro and instead gave their support to a project so economically insane that it only could have been envisioned by the type of people the British historian Paul Johnson called “Intellectuals”.

And don’t say you where not warned. Milton Friedman had warned you that forced monetary integration would cause political disunity and would be an economic disaster. He was of course right.

Bernard Connolly who wrote the book “The Rotten Heart of Europe” warned against exactly what is going on right now. Nobody wanted to listen. In fact Bernard Connolly was sacked from the European Commission in 1995 for speaking his mind.

The sacking of Bernard Connolly unfortunate is telling of lack of debate about monetary policy matters in Europe. Any opposition to the “project” is silenced. The greater “good” always comes first.

There have only been referendums about euro adoption in a few countries. In Denmark and Sweden the electorate have been wise enough to go against the “orders” of the euro establishment. As a consequence both countries today are better off than if the electorate had followed the orders of the elite and voted ‘yes’ to euro adoption.

It is easy to understand the frustration of the European voters. They have been lied to. Unfortunately the outcome is that voters across Europe now are happy to vote for parties like Front Nation, UKIP, Podemos and Syriza. I ask you the cheerleaders of the euro project – is this what you wanted?

I can only say that I can understand the Greek population’s anger over seven years of economic and social hardship and I likewise can understand that the taxpayers of Finland don’t want to pay for yet another meaningless bailout of Greece. But you should not blame each other. You should blame the European politicians who brought you into the euro.

Blame the eurocrats who never understood Hayek’s dictum from his great book “The Fatal Conceit”:

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

The euro is a fatal conceit.

UPDATE: I now have some empirical evidence that the euro is indeed a Monetary Strangulation Mechanism.

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If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: daniel@specialistspeakers.com or roz@specialistspeakers.com.

Mr. Farage made me happy and then worried. UKIP should support NGDP level targeting

If there is anything that the governing Tory party in the UK is fearing then it is the UKIP. The anti-EU UKIP wants to take the UK out of the EU, but it also wants something less – monetary reform!

This is UKIP leader Nigel Farage in the City AM:

“WHEN Mark Carney takes over as our new governor of the Bank of England, at this time of “exceptional” economic crisis – his words not mine – he must be fully armed and working to a clear political direction from the start. Carney’s first day on the job should be an economic D-Day for the UK.

That is why I want to be the first UK political leader to commit my party to changing the Bank of England’s mandate. It’s time to put the Bank, with its increasing powers and broadening economic reach, on the side – incontrovertibly – of the struggling people of Britain.

The status quo is not an option. British voters have made it clear in three by-elections, each time with rising force, their feeling of intense anger at the Westminster and Brussels elite. Ukip carries the flag for these voters. I’m proud that I can give voice to their anger, while offering them something positive to do with their vote. But Ukip offers more. We offer a future in which Britain is free to govern itself, to enforce its own laws, to control its borders, and to make its successful way economically – trading at a profit and able to honour promises to its citizens. A first and crucial step is that we take back the commanding height of our economy – the Bank – and put it to work driving employment, growth and confidence.

I expect George Osborne to use this Budget – three years late – to open the debate on the objectives of the Bank, and to lay out the options for change. But I call on him to go further. He must put some red British meat into the dish. He should announce which option he prefers, and set a fixed timetable for the consultation and the decision. He must guarantee that, by Carney’s first day, the new framework is in place.

Why do I put this pressure on him? Because one of the many failures of this government has been its inability to take the decisions needed to put growth and confidence first. The list of its jellied failures to decide is long – on energy, aviation, housing, roads, and infrastructure investment. Neither the public nor businesses know whether to be confident and spend, invest, or hire.”

When I saw Mr. Farage’s comments today my response was wauw! This is pretty incredible – the Tories are coming under attack from the right to change the mandate of the Bank of England in a more pro-growth oriented direction.

So what is the Market Monetarist response? Well, it is easy. Yes Mr. Farage is completely right – the BoE’s inflation target is terrible and should be changed. He is also right the that the UK economy needs monetary “stimulus” in the sense that nominal GDP has fallen well-below the pre-crisis trend level.

However, I must say that Mr. Farage’s comments also come across as being advocating a significant level of monetary activism which I find very problematic. In fact it seems like Farage is just calling for monetary stimulus – yes that might be needed at the moment, but it is terribly dangerous if the institutional framework is not correct. We don’t want a return to the inflationary 1970s. We want a monetary constitution for Britain. Not a hawkish or a dovish monetary policy, but a neutral monetary policy. UK monetary policy has been overly tight so monetary easing should be welcomed, but I much prefer this to happen within the framework of a proper NGDP level targeting regime.

Therefore, Mr. Farage you are right to be outraged by the UK government’s lack of action on changing the Bank of England’s mandate, but you should be more clear on the mandate you want. Ask for an NGDP level target for Britain. It is in the country’s best interest!

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