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.

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.
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24 Responses to The Euro as the SDR of Europe?

  1. Aitor Calero says:

    Hi Steve, my first comment here. Do you know the work of Bernard Lietaer about parallel currencies. I’ve just yesterday publish a post in my blog about its applicability in Spain as a way to foster local trade and services. The Swiss have been using the WIR since 1930s as a secondary currency, and it seems to me pretty much the same idea you expose here. Here is the link to my article in Spanish in case you would like to read it. It also have videos in English at the end.
    Una solución monetaria moderna para que fluya el crédito en pymes y autónomos

  2. The Japanese Yen is a sovereign national currency, representing the largest GDP/federal debt ratio of the top twenty industrialized nations.

    The empirical case for asset debt saturation macroeconomics.

    The model for a doable mini debt jubilee: (It has already been initiated in QE 1 and 2 by the US central bank) Create a central bank ledger. Trade ledger entries in that bank’s accounting file to pay for essential public services and augment some private services for the next 10 years of asset valuation deterioration and bad debt liquidation. In essence trade electronic currency for the citizen’s wages to maintain the system. In ten years after a new asset debt equilibrium has been reached, jubilee the ledger entries.

    And this is why the Italians will need the lira and the Greeks will need the drachma and the grand European experiment as suggested by Dr. Keen’s piece will fail.

  3. Pretty hard to comment on this without the in-depth background at fofoa. Still, suffice to say that the Euro has not yet reached its intended mode of operation.

    The Euro is designed do be defaulted within and survive. Will see how it all plays out.

  4. Pingback: Links 7/26/12 « naked capitalism

  5. daniel clarke says:

    this argument seems to be the euro is bad because individual countries are forced to pursue austerity because devaluation and debt funded stimulus arent possible and default isnt desirable.

    i’m interested to know what the alternative is to austerity (aka balancing a budget) in the medium to long term.

    the british and us govts are financing their deficits through QE and market support without a plan to one day have a balanced budget. Is it a safe assumption for these countries that the resulting growth will be one day balance the budget ?

    If not, then a country pursuring debt financed stimulus may reach some point where further QE is not possible and the market will no longer buy or roll over debt and the choice will be default or a much more devastating and urgent austerity than what europe is doing today.

  6. karabar says:

    Is there no end to Krugman’s idiocy? Here he weighs in on the climate debate, with nothing other than an alarmist blogger as evidence!

  7. Glenn Stehle says:

    I find the idea of “supra-national authority” intriguing, and more so from a political than an economic perspective (as if politics and economics could ever be separated).

    As Hannah Arendt points out in The Origins of Totalitarianism, it was a dissonant combination of both nationalist and anti-nationalist ideology—-a combination of continental imperialism and the pan movements—-that inspired the totalitarian movements:

    Nazism and Bolshevism owe more to Pan-Germanism and Pan-Slavism (respectively) than to any other ideology or political movement… While neither Hitler nor Stalin has ever acknowledged his debt to imperialism in the development of his methods of rule, neither has hesitated to admit his indebtedness to the pan-movements’ ideology or to imitate their slogans…

    [E]ven the fanatical adoption by the Bolsheviks of the greatest anti-national doctrine, Marxism, was counteracted and Pan-Slav propaganda reintroduced in Soviet Russia because of the tremendous isolating vlue of these theories in themselves….

    Tribalism and racism are the very realistic, if very destructive, ways of escaping [the] predicament of common responsibility.

    I see a similar dissonance in Germany today, with certain segments of German society (the biggest being the country’s transnational capitalist class and its agenda to create a transnational state which will not serve the interests of the German people, but the interests of transnational capital) propagandizing German prudence, industriousness and moral virtue while at the same time demonizing the character of the nations of the periphery. The transnational capital class in the periphery nations provide the mirror image of this, appealing to national pride to hide the fact that the policies they advocate do not enhance national interest, but the interests of the transnational capitalist class.

    Practical, common sense proposals like those posited by Steve Keen would undoubtedly advance the interests of the vast majority of Europeans, regardless of which nation they live in. But they would also be detrimental to the interests of the transnational capitalist class, which now enjoys a monopoly of political power in Europe. There will be no substantive change in the European economic situation until the political center of gravity shifts.

  8. eric p says:

    Steve, Have you considered the possibility of diversification through complementary currency along the lines of what Bernard Lietaer has been doing? He’s one of the former architect’s of the Euro, and has be promoting complementary and local currencies since the financial crisis of 2008 started.

    I think that the only way to engineer diversification away from correlation and contagion is to implement Lietaer’s ideas. I don’t see them being in contradiction to your own work.

    Complementary currency solves the issues of capital flows through every segment of the economy and shifts us off a debt based economy. Obviously, this would be looked down upon by the powers the be, but by the time we hit the next financial crisis, I’m sure people might choose to implement a non-dollar based currency system in their personal and business lives.

  9. john swabey says:

    Can we call it IMF lite instead of the Euro? No thank you – looks like a LIBOR 2.0 to me.

    With debt growing faster than GDP why does the ECB not look towards constraining debt growth and implimenting debt free printing of the difference between debt growth and GDP growth. The print to be focused towards debt reduction by a social network tool – something like kickstarter,, where each person in a nation in the top 50% of GDP growth gets one vote on allocation of the print to pay down debt – socialize the scandals and manage down the big brother effect.

  10. Steve Hummel says:

    The Dividend is the appropriate supplement and eventual replacement of the wage.
    Otherwise cost accounting convention and the inexorable march of technology will leave us with Banks and Producers sequestering their production behind well secured walls while nearly everyone starves. You have to consider BOTH the big picture AND the seemingly mundane….or reality escapes you.

  11. F. Beard says:

    But what about your “A Modern Debt Jubilee”? Wouldn’t that allow debts denominated in Euros to be paid with Euros? Without disadvantaging non-debtors?

  12. Steve Hummel says:

    SDR’s are a way for the Financial system to remain elitist and dominating. I’d rather see not only the economic, financial and monetary systems, but ALL of Humanity’s systems…..serve Man instead of making Man serve them.

  13. impermanence says:

    If the premise of your monetary essentially states that .001% of the population is going to own half of everything, then it seems logical to conclude that there are going to be some provisions that make little sense to the common man.

    This would be like building a trans-national, ten lane superhighway in your country that is only accessible to people with Ferrari’s. When monetary systems are designed only to work for the super-rich[their capital], then they only work for the super-rich.

    The Euro was ALWAYS about capital.

  14. Steve Keen says:

    I’ve heard of Lietaer and his proposals but haven’t had the chance to follow them up in detail. Complementary currencies clearly make sense during a debt-induced crisis in the standard credit money system, so I am inclined to be sympathetic to his ideas.

  15. Steve Keen says:

    Yes F.Beard, but I’m not putting all my eggs in one basket–and the Euro is a different basket(-case) as well of course!

  16. Bhaskara II says:

    In this case would real people use the central euro?

    “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. “

  17. mahaish says:

    “With the volume of the Euro being controlled by a supra-national authority (the ECB),”

    well this isnt stricktly correct. domestic country treasuries can create euro deposits within their domestic banking system, and we have seen they can contravene maastreicht.

    which means their is no constraint other than a legal/convention in terms of how many euros can be created within a domestic economy.

  18. Paulo Garrido says:

    The solution of the problem can be framed as reforming the Eurosystem (rather than breaking or dissolving it).

    I agree with multiple currencies.

    Rather than a single currency, a reformed Eurosystem will have up to 18 currencies. It could be the 17 Euronationals and the reference value Euro.

    I disagree with the SDR / Bankor like idea. Instead…

    The Euronationals (EAF – EuroAustrian Florin, EBF, EuroBelgiumFranc), will be full floating currencies. The Euro will be used to settle inter-national Euro denominated debts.

    The unsolved problem is to define the reference value Euro in such a way that the majority of debtors and creditors will accept the definition.

    To solve this problem one can observe that widening exchange rate between two currencies are win-loser for one of two contractors depending on which currency the contract is denominated.

    Shrinking exchange rates is win-win regardless of currency denomination.

    This suggests the principle of sharing equally the losses in case of widening exchange rates to define the Euro as a reference value.

    The research question is then to give operationally meaning to “sharing equally the losses” and estimate the consequences for each of the meanings found.

  19. john swabey says:

    Maharishi are you saying Euros can be created where there is not an addition of an asset due (in Euros) on the other side of the balance sheet at a value greater than the euros created?

  20. Glenn Stehle says:

    impermanence said:

    This would be like building a trans-national, ten lane superhighway in your country that is only accessible to people with Ferrari’s. When monetary systems are designed only to work for the super-rich[their capital], then they only work for the super-rich.

    This has pretty much been the history of supra-national authorities. Even when they are not created for the specific purpose of imperialism and domination, which they almost always are, they have been a total failure when it comes to protecting and assuring human rights.

    Hanna Arendt takes a look at the performance of supra-national authorities in the period from about 1875 to 1945 in The Origins of Totalitarianism:

    The Rights of Man, after all, had been defined as “inalienable” because they were supposed to be independent of all government; but it turned out that the moment human beings lacked their own government and had to fall back upon their minimum rights, no authority was left to protect them and no institution was willing to guarantee them….

    These facts and reflections offer what seems an ironical, bitter, and belated confirmation of the famous arguments with which Edmund Burke opposed the French Revolution’s Declaration of the Rights of Man. They appear to buttress his assertion that human rights were an “abstraction,” that it was much wiser to rely on an “entailed inheritance” of rights which one transmits to one’s children like life itself, and to claim one’s rights to be the “rights of an Englishman” rather than the inalienable rights of man. According to Burke, the rights which we enjoy spring “from within the nation,” so that neither natural law nor divine command, nor any concept of mankind such as Robespierre’s “human race,” “the sovereign of the earth,” are needed as a source of law.

    The pragmatic soundness of Burke’s concept seems to be beyond doubt in the light of our experiences. Not only did loss of national rights in all instances entail the loss of human rights; the restoration of human rights, as the recent example of the state of Israel proves, has been achieved so far only through the restoration or the establishment of national rights.

  21. Steve Hummel says:


    Yes, the nation is the appropriate vehicle for guaranteeing inalienable human rights. The concept of subsidiarity is relevant here. We must not be fooled into thinking that such rights are in any way less real however. If one considers that it is indeed a BOTH/AND world, i.e. BOTH a temporal/physical one AND an inward/eternal one ALSO…..then we are closer to the ACTUAL and HIGHER…..REALITY. To throw away or denigrate one aspect of reality is misguided and one eyed indeed.

  22. Andrew Rabbitt says:

    A sovereign currency is exactly that. The currency of the sovereign, or the ruling classes. Its use helps fund the protection racket that is ‘government’. The US can demand that the dollar be used as the reserve currency only because of the global reach of its coercive forces.

    Likewise, a sovereign demands that your protection money (taxes) be paid in its currency to make it have value. African Hut Taxes are one of the most vivid demonstrations we have of how this mechanism works. Fiat be damned, it’s only because a declaration is backed by coercion.

    The Euro then is only making the contracting states the middlemen of a gigantic protection racket. The sovereign power base has shifted to Brussels which taxes not the citizens of the states but the states themselves. Since the memory of European instability still lingers, it’s still possible for the European Protector of All Things to promise peace and stability in return for obedience to the Great Directives. Once the reality of this deception becomes obvious, the Euro crumbles, Emperor Baroso will stand naked and the populace will begin again trading with cigarettes. It could be a good thing that the anti-smoking lobby has been less successful in Europe than it has been in Australia…

  23. Willy2 says:

    Bolderdash. Running deficits for ever is NOT the solution. Everyone thinks that the US is the best example for Europe. The problem – as Mr. Keen has pointed out – is the total amount of debt.

    The US will break up AS WELL. In spite of what all the economic pundits say or think. The US will come unglued like the Soviet Union did in the early 1990s because the glue (a.k.a. US taxrevenues) will become less and less abundant. Sooner or later US states, who pay more taxes to Washington than they receive from Washington WILL leave the currency union called USA.

  24. Kozak says:

    The reason why we had tribes and then nations is because some tribes work harder or smarter than others. Some tribes followed rules of law and ethics.

    Currencies represent the tribe that controls its production.

    Just like a small farm with an individual farmer, accurately knows the soil type to suit the plant down to the square metre, so too does the individual currency reflect the economic health of tribal regions. If the farmer stuffs up, he loses. The region does not suffer. Works the same with Nations.

    Once we go Bancor, SDR, or US Dollar, it is prone to currency manipulation by the political class. The Continent gets flabby. It becomes a welfare state. The strong are abused by the weak.

    If we avoided the Euro, the US would have been toast, as the world flooded into the Yen or Mark. After the US elections watch the Chinese float their currency and suck in the capital of the world. The US dollar is toast after December 2012.

    Buddy Rojek, B.Comm, CPA
    Australian Nationalist Party.

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