Saving Europe’s Money

Amidst the anti-inflationary policies presently pursued by most of the world's important central banks, the global economy continues to grow impressively. Even a number of Europe's lackluster economies are beginning to register respectable growth rates.

One dark cloud, however, overshadows these positive developments. It comes from an unlikely source: France's new President Nicolas Sarkozy. In contemporary "Social Europe," Sarkozy is considered an economic liberalizer. He intends, for example, to liberalize France's hyper-regulated labor market to reduce unemployment (especially among young people and Muslim migrants), improve flagging French productivity, and halt the exodus of French citizens seeking work abroad.

Sarkozy also wants to increase exemptions from France's notorious fortune-tax which has turned thousands of French citizens into tax exiles, and to cap the total individual income tax rate at 50 percent.

These are good first steps. Unfortunately there is another side to "Sarkonomics" which may have negative consequences for the entire European Union.

First, there is Sarkozy's recent successful effort to have the EU dilute its decades-old formal commitment to free competition that was partly driven by his desire to shore up France's economic "champions of industry." This begs the question: if these companies are such "champions," why do they need protection from foreign competition?

Even more worrying is Sarkozy's expressed desire to significantly augment EU governments' control of the European Central Bank and exchange rate and interest rate policies.

Politicians of all complexions have plenty of incentives to want to exercise strong influence over central banks. Such control provides politicians with opportunities to manipulate currencies and interest rates to maximize their reelection chances, regardless of the long-term fiscal consequences. It also gives politicians the option of letting the inflation genie out of the bottle to boost short-to-medium term employment at the expense of devaluing people's savings, shattering price stability, and undermining long-term employment growth.

Governments' tendencies to succumb to such temptations are hardly new. One of the most devastating critiques of such fiscal irresponsibility was written almost 400 years ago by a Spanish Catholic theologian, Juan de Mariana (1536-1624), in his famous Treatise on the Alteration of Money (1609).

 An outspoken figure, Mariana's criticisms of the Spanish monarchy's monetary policies — specifically its habit of currency manipulation — marked him as a dangerous man in the eyes of sixteenth- and seventeenth-century monarchs. Currency depreciation was regularly pursued by most European monarchs to finance their wars and arbitrarily reduce their debts.

Mariana's opposition to such policies was moral and economic. His moral objection was that just as a monarch had "no right to tax his subjects without their consent," a king also "had no right to lower the weight or quality of the coinage without their acquiescence."

"If a prince," Mariana wrote, "is not empowered to levy taxes on unwilling subjects, and cannot set up monopolies for merchandise, he is not empowered to make fresh profit from debased money."

Mariana's primary economic arguments were that (1) the price-increases fuelled by monetary debasement and the subsequent inflation hurt those on low- and fixed-incomes; and (2) diminished confidence in the currency's relative stability and ability to accurately reflect the true value of goods and services undermined basic prerequisites of prosperous economies.

Such was the Spanish monarchy's fury at Mariana's criticisms, it imprisoned the aging priest for almost a year and confiscated his papers.

Recognizing the economic dysfunctionalism associated with excessive government control of money, many countries have legally mandated their central banks' independence. But what governments give, they can also take away. In February 2007, Venezuela's Hugo Chavez terminated the independence of Venezuela's central bank as part of his "new socialism" agenda.

Even when central banks' independence is legally mandated, plenty of central bank governors' memoirs detail the myriad ways in which governments seek to unduly influence their decisions.

Many recall the unseemly squabble surrounding the 1998 appointment of the European Central Bank's first president, the late Wim Duisenberg. So determined was France's Jacques Chirac to have a Frenchman at the helm, he forced through an "informal agreement" (publicly denied by all concerned parties) that Duisenberg would "voluntarily retire" 2 years before the end of his six-year term and be replaced by current ECB president Jean-Claude Trichet.

Sarkozy's desire to diminish the ECB's independence thus represents continuation of his predecessor's economic policies. But it also reflects the centuries-old unwillingness of many European politicians to leave Europe's currencies alone. Mariana highlighted this at the expense of his liberty.

In 1976, the Nobel Laureate economist Friedrich von Hayek argued that "denationalizing money" might be the only way to decisively limit governments' ability to manipulate money to further their own narrow ends rather than the common good.

Perhaps it's time for Hayek's and Mariana's fellow Europeans to start thinking the hitherto unthinkable.

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  • Guest

    Interesting.  Thank you.

    As a mother who homeschools, I am always interested in Catholics, especially priests who acted heroically in the secular world.  I've got a child studying econ/gov this year, so I"ll use Fr Mariana as an example…funny enougn I never heard about him an my dad is a PhD Economist!

  • Guest

    God loves you .

    Oh, elka, your Dad probably lost the old priest among the smoke, mirrors, wet-finger-in-the-air and goat guts that economists often seem to use.

    Of ‘denationalizing money’ – wasn’t that a purpose of the Euro? It seems merely to have given some European leaders a currency of wider ranging effects to manipulate.

    Remember, I love you, too

    Reminding that we are all on the same side – His,

    Pristinus Sapienter

    (wljewell or …

  • Guest

    Wljewell, don't forget one of economic's favorites, the dismally scientific arranging of bones. Western Europe has turned it's back on what made it great. Life for them will be uphill all the way. I spoke with a Frenchman at a family function, he said he likes Sarkozy because he is willing to try some fresh programs.

  • Guest

    A devalued currency does not reduce peoples savings unless those savings are exchanged in the form of purchases of foreign money or goods.  If the same savings are sold for a foreign currency they would actually increase in value.  Since almost all of a nation's currency is normally exchanged internally, and not for a foreign currency, the change is normally benign and does not impact on savings.  The best example of that is evident in trade between the USA and our largest trading partner Canada.  In the last four years the US dollar has lost almost 40% of it's value compared to the Canadian dollar, but that loss of value, even with out largest trading partner, has had no impact on US savings.  Whatever has happened to savings has happened for some other reason, because less than 1% of the US population buy and sell in the foreign currency exchange markets.

    All governments minipulate their currency at one time or another, by one means or another, usually to manipulate their balance of foreign trade, but I don't see anything sinister in that.  More damaging is the practise of the OPEC countries that protect themselves against monetary exchange losses by accepting payment for their crude oil only in US dollars.  China does the same thing by prohibiting their yuan to be traded freely and attaching the value of the yuan to the value of the US dollars – they won't let the yuan float. 

    Over half of the Canadian companies that export their goods and services will accept payment from foreign customers only in US dollars – not their own currency.

    France recently voted down ratification of the EU Constitution and one of the main causes was that it did not give France enough power in the management of the ECB.  The smaller countries will never ratify what the French want, and the EU could become "social" in fact – Ok for passports, but without any fiscal role to play.

    France is to the European Union as Judas Iscariot was to Christ and the Apostles.   





  • Guest

    "A devalued currency does not reduce peoples' savings unless those savings are exchanged in the form of purchases of foreign money or goods."

    How often are you able to buy something that has no relation to global markets? Have you bought anything from China lately?

    According to the consumer price index, in the last 4 years the value of US dollars in the US has gone down 11.7% Nope, not 40%, but still pretty bad. If you thought your retirement savings was doing well, remember that the money in there is worth 11.7% less than it was worth 4 years ago.

    I'd rather not have to fight that much devaluation.

    On the other hand, your mortgage is effectively costing you 11.7% less too, no matter how much you have paid against the principal. This is why governments, being huge debtors, don't really care about devaluation. That's the easy way to get rid of the national debt.

    (I got the CPI data here )