Everybody knows what’s wrong with Euro. It’s not even worth posting a link. Okay, here’s one link to FT. Everybody knows what’s wrong with the Euro, and how to fix it. The problem is that the fix is totally unrealistic. Here, we look outside the box for a different solution.
The problem with the Euro is that a common monetary policy does not suit all participants. France could use looser money as stimulus and to monetize some debt. Germany and the northern countries have much less debt and lower bond yields. They don’t need their currency devalued.
Common monetary policy only works if the participants have similar fiscal policy. This is why the Maastricht treaty set limits (which were ignored) on national debt and deficits. France is a deficit country, with debt at 94% of GDP. Germany, at 78%, is a fiscal discipline country.
The popular solution is “ever closer union,” which means taking fiscal policy away from the nation states, with the European Parliament setting the budget for all. There would even be a Europe tax, levied over the heads of national governments, to pay interest on Euro bonds.
This is a swell idea, if you’re the kind of person who prefers giant federal governments to quaint national ones. Unfortunately, about 500 million people suspect an undemocratic plot to disenfranchise them and abridge their national identity.
Furthermore, everyone knew in 1992 that the Euro would not hold together unless the nation states surrendered to European fiscal authority. One could even say that the common currency was a Trojan horse for “ever closer union,” lying in wait for a crisis like 2008.
So, we wondered why the revolutionary governments of Virginia, Georgia, et al., would surrender their monetary independence to the new federal government of the United States in 1787. Surely, the democratic impulse was at least as strong in early America as in modern Europe.
Indeed, the currency trap has operated in America exactly as it is operating in Europe, with the states subordinated to federal policy. It took almost two hundred years, though, for monetary policy to be invented.
This brings us to our iconoclastic solution for the Euro. Peg it to gold, or – since gold is a barbarous relic – palladium. Instead of a Euro budget to mesh with monetary policy, take the power entirely out of federal hands. Think of the management effort that would be saved.
No one could whine about fiscal discipline dictated by Germany. Once the peg were set, discipline would come from the bond market. National leaders would have full responsibility for their own budgets, and no excuses.