The Euro as the SDR of Europe?

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The Euro is the nation­al cur­ren­cy of a coun­try that does not exist. Though there is a con­ti­nent of Europe, as there is of Amer­i­ca, there has nev­er been a coun­try of the Unit­ed States of Europe, and there prob­a­bly nev­er will be.

The Euro is there­fore not a cur­ren­cy as is the Amer­i­can dol­lar, and yet it is forced to mas­quer­ade as one—badly—by the Maas­tricht Treaty, in which the coun­tries of Europe aban­doned the right to pro­duce their own gen­uine nation­al cur­ren­cies.

With the vol­ume of the Euro being con­trolled by a supra-nation­al author­i­ty (the ECB), and mem­ber states pun­ished for breach­ing rules on gov­ern­ment spend­ing (the 3% max­i­mum deficit and 60% accu­mu­lat­ed deficit rules), the Euro is clos­er in func­tion not to a cur­ren­cy, but to Spe­cial Draw­ing Rights as they were con­ceived of by Keynes at Bret­ton Woods. In his plan for a post-WWII inter­na­tion­al mon­e­tary sys­tem, Keynes pro­posed that com­mon supra­na­tion­al cur­ren­cy be used for inter­na­tion­al trade (the “Ban­cor”), while domes­tic cur­ren­cies should used for inter­nal trade. The exchange rates between nation­al cur­ren­cies and the Ban­cor were to be fixed, with per­sis­tent trade deficit coun­tries being forced to impose aus­ter­i­ty and deval­ue, while per­sis­tent sur­plus coun­tries were taxed Ban­cors, and required to stim­u­late their economies to increase imports.

Key­nes’s Plan was scut­tled by the USA’s insis­tence on its “first among equals” sta­tus after WWII, lead­ing to the cri­sis that the glob­al econ­o­my is in today. The Euro, with its half-heart­ed-hybrid struc­ture as a cur­ren­cy that is not a cur­ren­cy, and its puni­tive rules on (gov­ern­ment) deficit nations sans stim­u­la­to­ry rules on (gov­ern­ment) sur­plus nations, has turned that cri­sis into a cat­a­stro­phe. Keynes would have railed against idea that the Ban­cor should also be the cur­ren­cy of nation­al com­merce as sheer mad­ness, giv­en his pre­scient posi­tion that “above all, let finance be nation­al”. Yet that is what the Euro attempts to be.

Some see the way out of today’s cat­a­stro­phe as cre­at­ing what does not exist—the Unit­ed States of Europe. But if that were ever a pos­si­bil­i­ty, it is far less one after the dam­age done by Maas­tricht, and the Fran­co-Ger­man insis­tence on aus­ter­i­ty for the periph­ery in this cri­sis. How­ev­er what is a possibility—and which has echoes in some of the con­tri­bu­tions here (such as “Nau” pro­pos­al from Ger­ald Holtham)—is to move the Euro clos­er to a con­ti­nen­tal ver­sion of Spe­cial Draw­ing Rights.

The Euro could be the cur­ren­cy of inter-Euro­pean and inter­na­tion­al trade, while “sub-Euros” cre­at­ed by each of the nations of Europe could be used for domes­tic trade and, impor­tant­ly, domes­tic finan­cial arrange­ments. The dis­ci­pli­nary aspects of Maastricht—which are cur­rent­ly inap­pro­pri­ate­ly direct­ed at gov­ern­ment deficits and are ampli­fy­ing the downturn—would then be redi­rect­ed at trade deficits with­in Europe instead (and matched by pres­sures to min­i­mize intra-Euro­pean trade sur­plus­es as well).

The Euro-Drach­ma, Euro-Peso and Euro-Mark could be intro­duced at one-to-one par­i­ty with the Euro, and all finan­cial assets and lia­bil­i­ties would be denom­i­nat­ed in these nation­al cur­ren­cies rather than the Euro. These nation­al cur­ren­cies would then float freely for a peri­od (say one year), after which they would be fixed in pro­por­tion to the Euro.

The obvi­ous deval­u­a­tion that would occur for the Euro-Drach­ma and Euro-Pese­ta would reduce their for­eign debts—and force the nations whose banks over-lent to them to deal with the con­se­quences. It would also end the cur­ren­cy flight that is cur­rent­ly occur­ring: a Euro-drach­ma would still be a Euro-Drach­ma, whether it resided in a Greek or Ger­man bank account.

The intro­duc­tion of such a sys­tem could pro­vide a rapid res­o­lu­tion to the cur­rent cri­sis. It could not be pain free, but it would be dif­fi­cult to imag­ine that it would impose more pain than is cur­rent­ly being felt by Greece and Spain, or is about to be felt by oth­er coun­tries once the con­ta­gion pass­es on to them.

This sys­tem would also intro­duce what is oth­er­wise impos­si­ble in the Euro: exchange-rate flex­i­bil­i­ty. Econ­o­mists as wide­ly apart ide­o­log­i­cal­ly as Wynne God­ley and Mil­ton Fried­man observed long before the Euro began that it would fail (a) because it imag­ined that a mar­ket econ­o­my would reach a har­mo­nious equi­lib­ri­um on its own with­out gov­ern­ment intervention—which God­ley cor­rect­ly char­ac­ter­ized as a delud­ed neo­clas­si­cal fan­ta­sy; and (b) because it pushed togeth­er wide­ly dis­parate nations which Fried­man not­ed were utter­ly unsuit­ed to a cur­ren­cy union.

A step back­wards by Europe from dystopi­an fan­tas­ti­cal object of a sin­gle cur­ren­cy, to a mini-ver­sion of what Bret­ton Woods should have been, could thus be a work­able way out of this cri­sis and towards the polit­i­cal dream of a non-frac­tious Europe.

This post orig­i­nat­ed in a request that I con­tribute to a debate on the Euro at Open Democ­ra­cy in response to George Soros’s pro­pos­als and his obser­va­tion that there were just 3 months left to save the Euro.

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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.