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Lately I have been coming across the dubious pro-market account of breaking up the eurozone on the premise that it will lead to the creation of many currencies that will effectively compete with one another. The argument goes that since competition is always a factor of efficiency, then so must the competition of national fiat currencies be beneficial. The advocates of this theory assert that the presence of the euro leads to an artificial situation, alien to a free market, since it deprives the EU from free competition. Hence, they conclude, the single European currency is both suboptimal and undesirable.
I am afraid that this account is one of the cases where a sound axiom (competition) is distorted and inwardly degenerated into its actual opposite through the pilling up of fallacious assumptions and misconceptions. The problem does not lie in the principle of free market competition as such, but in the pernicious illusion that cartelized national currencies will “compete” in an environment reminiscent of a genuine free market, when in truth we will only witness a race to the bottom between state entities (central banks), in a rather mercantilist, “we against them” framework. The core error therefore is the misunderstanding of the concept of “competing currencies”.
The Free Banking School and competing currencies
As a corrective to this account on the break up of the eurozone, it must be stressed that when Free Banking School economists speak about competing currencies, they do not refer to national fiat currencies but assume that money will be denationalized, as F.A. Hayek had suggested in his book “Denationalization of money: The Argument Refined“. In such a denationalized monetary system the competition is only between private banks that issue their own currencies. However the institution of monopolistic central banking is abolished, otherwise the whole edifice cannot hold together.
This crucial detail completely destroys the case of “competing” national currencies in Europe. Free banking is fundamentally different from the arguments put forward by banal neoliberals who assume genuine competition between National Central Banks and their respective fiat currencies. Their shaky proposal, becomes even worse when they fall into reveries of genuine competition between corporate money and state money, which in effect resembles the kind of uncontrolled, inflationary, wildly speculative bonanza that led us to the Great Recession (financial derivatives as private money, coupled with the Fed’s expansionary policy of fiat money).
It is perfectly acceptable to contemplate on the free banking ideal, something that many economists have been doing in recent years, such as George Selgin and Steve Horwitz; but I believe it is completely false to effectively argue that NCBs with monopoly over money and with the power of compulsion provided by the rest of the state apparatus, will create a “free banking-competing currencies” environment.
If we were to be true to the Hayekian theme of free banking in order to consistently argue along the lines of competing currencies as an opposition to the euro; we would necessarily have to stand up to the monstrous task of proving that all central banks and all fiat money are also detrimental to an ideal free market; and therefore need to be abolished in the general process of denationalization and deregulation of the economy.
If the self-proclaimed free marketeers were willing to go to that end, then and only then could we seriously discuss the abolition of the euro over the prevalence of competing currencies, on the basis of a cost-benefit analysis. But for as long as they constrain their laissez-faireism to the level of national government paper, accompanied by corporate money, I believe that they are only expounding on the vulgar alter ego of corporatist quasi-nationalism; which on examination will be found to be hostile to libertarianism. For if their assertion of competing NBCs were correct, then it could also be deduced that any kind of “national competition” is beneficial, which understandably leads down the perilous path of protectionism, mercantilism and state omnipotence.
They misinterpret a real world phenomenon
Yet this is not where their problem ends, as they have incorporated another egregious fallacy in their doctrine. They uphold that national currencies will somehow restrain government spending since profligate politicians will no longer be able to borrow cheaply, something that they could do during the pre-crisis years of the euro. This implies therefore the absurd position that “profligacy” was born with the euro and is deeply embedded in it; whereas all hitherto governments were prudent in their spending when they had their national currencies in place. Such a multi-illegitimate conclusion derives from the observation that interest rates in the eurozone converged and countries like Greece could borrow at rates that only Germany could enjoy before.
Though the convergence in interest rates is correct, this view is putting the cart before the horse, by confusing correlation with causality and by completely neglecting the perverse effects of the Basel Accords, whose ill advised capital requirements effectively demanded from banks to invest in sovereign bonds, as those would bear zero risk in the weighting of assets.
Moreover one only has to look at the fiscal position of governments prior to the euro era, or to check the current level of government spending and money easing in countries like the US or the UK, to realize that the argument of mystically restrained states by money they create out of thin air, is inconsistent with reality. This assumption effectively casts to the wind all economic knowledge on the subject.
The bottom line is that under the given circumstances in the eurozone’s political economy, the only realistic/feasible option, even from a Hayekian, free market perspective is the preservation and improvement of the euro; not some hermaphrodite, corporatist-free-market abomination, whose deleterious effects since 2007 are still part of our daily lives. In the end though the preservation of the euro is, in my view, far superior to a monetarist-turned-nationalistic race to the bottom between fiat currencies, euphemistically coined “competition”; just like the kind of “benign competition” prevailing in the despicable corporatism that led to the meltdown of Wall Street and the consequent Great Recession.
The euro and its constituent members have several flaws, no doubt about that, but we must treat them within the context of sound economic thinking not against the authority of reason and of facts.