CEQLS Lecture: Philipp Bagus: The Tragedy of the Euro

The Tragedy of the EuroPhilipp Bagus

Conservative Economic Quarterly Lectures SeriesJune, 13, 2011

08.04.23 1Philipp Bagus: The Tragedy of the Euro

INTRODUCTION:

• Political analysis

• Economic analysis

understand €


TWO VISIONS FOR EUROPE:

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LIBERTARIAN:• Individual

liberty• Christian

parties•Treaty of

Rome• 4 Liberties

SOCIALIST:• Central state

• Socialist parties• Fortress Europe:

•Interventionist to inside

•Protectionist to outside

Philipp Bagus: The Tragedy of the Euro


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• Socialist tactic: Use crises to enhance power of central state• Protectorate Greece

• Germany, NL, GB vs. France (substitute for the lost empire)• Socialist vision appeared to be winning• Fall of the Berlin wall changes dynamics

• Germany grows, Eastern Europe against empire• Socialist reaction: go one step ahead. Means for centralization: €



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• Discipline imposed by the dreaded Bundesbank• Fall of Berlin Wall: Unique opportunity• Mitterand demands common currency in exchange for reunification• Euro provokes sovereign debt crisis -> more centralization• End of € = End of socialist vision


Why inflation prone countries wanted the €:

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• Get rid of Bundesbank• Prestige• Seniorage• Lower interest rates (government debt) • Excuse for austerity measures• Stronger currency (Imports)• Monetary redistribution

Consumption and construction boom


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Three month monetary rates of interest in Germany, Greece, Spain, Ireland, Italy and Portugal (1987-1998)



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Balance of Trade 1994-2009 (in million Euros)


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Competitiveness indicators based on unit labor costs, for Mediterranean countries and Ireland 1995-2010 (1999Q1=100)


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Competitiveness indicators based on unit labor costs, for Belgium, The Netherlands, Austria and Germany 1995-2010 (1999Q1=100)


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Retail sales Germany, USA, France, UK (1996=100)


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Retail sales Spain (2000=100)


08.04.23 14Philipp Bagus: La tragedia del euro

Increase in M3 in percent (without currency in circulation) in Spain, Germany, Italy, Greece, and Portugal (1999-2010) Increase in M3 in percent (without currency in circulation) in Spain, Germany, Italy, Greece, and Portugal (1999-2010)

Why German elites wanted the €:

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• Population, economists, lawyers were against it• “Mitterand forderte Euro als Gegenleistung für die Einheit,” Spiegel online (2010)• Also get rid of the Bundesbank• Interest groups (Harmonization of regulation)• Exporters, banks• Prevent a sovereign and financial collapse


Money monopoly of the ECB:

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• Creates monetary base• Sthe banking system creates money on top• Privilege of fractional reserves in exchange for financing the deficit


Government

ECB

Banking system

Bonds

Money

Bonds

Reserves

Profits

Interests

Interest

Interest

Bank holdings of government debt (EU)

Government

Banking system

Insurers, hedge funds, pension

funds

Bonds

Money

Invest

Interests

Interests

Interests

Credit expansionOwners of factors of

production (workers…)

Bonds

Money

ECBBonds

Reserves

Incentives to run deficits:


• Deficit-> print bonds-> used as colateral -> new money• Cantillon effects: redistribution• Tragedy of the commons• Governments with highest deficits win• Comparable: Printing press with different owners• Cartelization: Stability and Growth Pact: Failure• Run for deficits

Euro generates conflicts:

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• Bastiat• Free trade• Generates peace


Euro generates conflicts:


• Deficits to maintain welfare state -> uncompetitive• Deficit -> trade deficit• Money extends and pushes up prices• Unsustainable: bailout• Generates conflicts

Conclusion:

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• Political project• Leads to centralization (deficits -> bailouts and finance ministry)• Three possibilities

• Reform SGP (harsh austerity measures and structural reforms)• Eurozone splits• Transfer unions, centralization


Thank you


Education

CEQLS Lecture: Philipp Bagus: The Tragedy of the Euro