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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  • Aitor Calero

    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

  • 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.

  • 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.

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  • daniel clarke

    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.

  • karabar

    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!

  • Glenn Stehle

    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.

  • eric p

    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.

  • john swabey

    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.

  • Steve Hum­mel

    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.

  • F. Beard

    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?

  • Steve Hum­mel

    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.

  • imper­ma­nence

    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.

  • 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.

  • 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!

  • Bhaskara II

    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. ”

  • mahaish

    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.

  • Paulo Gar­rido

    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.

  • john swabey

    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?

  • Glenn Stehle

    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. 

  • Steve Hum­mel


    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.

  • Andrew Rab­bitt

    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…

  • Willy2

    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.

  • Kozak

    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.