The following text on the Euro and the concept of money is a transcription of the conference given by Jorge Amar at the Attac Summer University for Social Movements held in Toulouse in August 2017. Jorge Amar is Economist, Chair of the Spanish Economic Sovereignty Association (APEEP) and Research Scholar at Binzagr Institute for Sustainable Prosperity.
What is wrong with the Euro? To answer this question, we need to understand first what money basically is, where it comes from, how it is created and destroyed.
There are two main theories on money: The market-metalist approach (“One money, one market”) on which the European Monetary Union (EMU) has been inspired, and the state-chartalist approach (“One currency, one nation”) which explains the usual situation where a currency corresponds to one country.
The Market-Metalist Approach to Money
For the market-metalist approach, money is only a veil over market and production: As a means to reduce the opportunity cost, for the followers of this approach money is always in short supply, just like real resources are.
The linkage of something material with our common idea of money is immediate: You can touch bills and coins; you can store them; there is a finite amount of ounces of gold or silver; it is hard to find –And you need to earn it or get it by trade or plunder. Money has value because it is scarce.
Our daily experience as money users reinforces this view: We can´t create money out of thin air. Or can we? What if we could?
The father of “Reaganomics” in Europe, Robert Mundell, began from market-metalist notions of reducing the opportunity cost and sought to displace the dollar as the main international reserve currency. Supported by the Theory of Optimal Currency Area, Mundell proposed the creation of a new currency zone in Europe.
In the 1970´s, the EEC commissioned two critical reports analysing the possibility of creating a common currency (for 6 countries). Reports by Werner (1970) and MacDougall (1977) were drafted before the virus of monetarism and the new monetary consensus infected the academy and the economic institutions. Both established one condition absent from the European Monetary Union– which is the existence of a common fiscal authority under democratic control. Without this, a union would necessarily be dysfunctional. But, fatally, the Euro could not afford to wait until this happened…
How could this condition be forgotten? Delors’ Commission deliberately ignored this condition –which would have prevented the monetary union from coming into existence in the first place– due to the resistance of the national governments to surrender power to any federal institution. In order to minimize any dissent on the monetary union, Delors’ Commission (at the suggestion of Delors himself) decided to exclude the ministers of finance and economy from the debate: The committee would “consist of the governors of the central banks, who were more independent than governments”[i]. As a consequence, the European Monetary Union was constructed without a common fiscal authority, with no European treasury, a dwarf budget (and this only for the EU as a whole), and with a Central Bank independent from democratic control and solely responsible for price stability (suppressing inflation by any means necessary). Crucially, the European Central Bank was expressly not conceived as a lender of last resort.
Back in 1992, the “wise man” of the UK´s Treasury, Wynne Godley, described the situation as dollows: “The central idea of the Maastricht Treaty is that the EC countries should move towards an economic and monetary union, with a single currency managed by an independent central bank. But how is the rest of economic policy to be run? As the treaty proposes no new institutions other than a European bank, its sponsors must suppose that nothing more is needed. But this could only be correct if modern economies were self-adjusting systems that didn’t need any management at all.” (https://www.lrb.co.uk/v14/n19/wynne-godley/maastricht-and-all-that)
Still, for Euro supporters, even if the Optimum Currency Area conditions do not exist at all, what is crucial about the Euro is what Robert Mundell asserted: “It puts monetary policy out of the reach of politicians(…) [And] without fiscal policy, the only way nations can keep jobs is by the competitive reduction of rules on business.(…) Monetary discipline forces fiscal discipline on the politicians as well.” (The Guardian https://www.theguardian.com/commentisfree/2012/jun/26/robert-mundell-evil-genius-euro )
The State-Chartalist Approach
For the state-chartalist approach, by contrast, money is no object. It is a public institution that is politically determined. Beyond the economists, most experts agree: A currency is a unit of account that the authority (the issuer) uses to command and mobilize the existing real resources in accordance with its goals.
For a issuer of currency, currency is never in short supply: Only real resources are. You can fall short of workers or materials to build a house; but you cannot fall short of the inches or meters (measurement units) needed to do it. Money is merely accounting information. It comes from nowhere and goes nowhere. In a sports match, for instance, Do we ask ourselves where the points on an electronic scoreboard come from or where they go to? Do we need to collect the points from somewhere? No. We merely mark up and down points as needed.
Money is the way we measure debt relations and we can establish an infinite number of debt relations between two agents. Therefore, money is not difficult to make. The real point is whether money is accepted. Because each time we write a check, each time we record one “I owe you”, we are creating money.
Why is currency (the money of the government) accepted, then? Because we need it to pay taxes (to redeem our tax obligations, destroying the currency in the process), and government can tax us every time it wishes to. So, to chartalists, there is a hierarchy of moneys that expresses its degree of acceptability.
On the top of that hierarchy is the non-convertible fiat currency. All debts are referred to it, all debts are cancelled by it. The issuer of the currency holds a power over the economic life that –from our point of view as users of money– is difficult to fathom. The issuer of money cannot go bankrupt. It can afford anything there is on sell in its own currency. In fact, the ECB knows this very well: It buys 80,000 millions of euros a month that are created from thin air!
Indeed, money and currency are created from thin air. But something has to back the up. In the case of a piece of paper with the words “I owe you an hour of work,” it is just my disposition to work and my ability to do it. In the case of the currency, it is the government’s capability to tax and to force people to comply with the law. Taxes, then, are important not because they fund anything (for the issuer of money, they do not), but because they make the currency valuable. The Euro severs this critical relation between the European nations that have accepted to join the monetary union and their currencies. De facto, these countries have adopted a foreign currency that is issued by a supranational bank, giving that bank a power over them that Greeks (and others) sadly know very well.
Wynne Godley explained the structural failure of the Euro project as follows: “The power to issue its own money, to make drafts on its own central bank, is the main factor that defines national independence. If a country gives up or loses this power, it acquires the status of a local authority or colony. Local authorities and regions obviously cannot devalue. But they also lose the power to finance deficits through money creation while other methods of raising finance are subject to central regulation. Nor can they change interest rates. As local authorities possess none of the instruments of macro-economic policy, their political choice is confined to relatively minor matters of emphasis – a bit more education here, a bit less infrastructure there. I think that when Jacques Delors lays new emphasis on the principle of ‘subsidiarity’, he is really only telling us that we will be allowed to make decisions about a larger number of relatively unimportant matters than we might previously have supposed. Perhaps he will let us have curly cucumbers after all. Big deal!”
Alternatively, the former member of the Bank of England‘s Monetary Policy Committee, Charles Goodhart, warns:
“The key relationship is the centrality of the link between political sovereignty and fiscal authority, on the one hand, and money creation, the mint and the central bank, on the other.(…) Historically, nation states have been able, in extremis, (whether in the course of war or other – often self-induced – crisis), to call upon the assistance of their money-creating institutions, whether the mint (..), a Treasury printing press, or the Central Bank. Whenever states (as in the USA or Australia), provinces (as in Canada), cantons, länder, etc., have joined together in a larger federal unity, both the main political, the main fiscal and the monetary powers and competencies have similarly emigrated to the federal level. The Euro area will not be like that. In particular, the participating nation states will continue to have the main fiscal responsibilities; but in the monetary field, their status will have changed to a subsidiary level, in the sense that they can no longer, at a pinch, call upon the monetary authority to create money to finance their domestic national debt.”
The crucial importance of monetary sovereignty is well-known even to economists of the ECB, as shown in this piece: “In an economy with its own fiat currency, the monetary authority and the fiscal authority can ensure that public debt denominated in the national fiat currency is non-defaultable, i.e. maturing government bonds are convertible into currency at par. With this arrangement in place, fiscal policy can focus on business cycle stabilisation (…). However, the fiscal authorities of the Euro area countries have given up the ability to issue non-defaultable debt. As a consequence, effective macroeconomic stabilization has been difficult to achieve.” (https://www.ecb.europa.eu/pub/economicresearch/resbull/2017/html/ecb.rb170629.en.html
In short, as a result of the Euro, we are now living in a dystopia, a nightmare designed by “free market” ideologists. The great French economist Alain Parguez describes the situation as “a pure folly denying all natural principles, which transformed the States into agents of speculation ready to ruin their people to save the banks’ balance sheets(…) EMU was the final outcome of a plan which started in the interwar period aiming at a totalitarian New Order inspired by the philosophy and backwards quasi-agrarian economics of Friedrich Hayek”.
Thanks for your attention.
[i] Cited in Mitchell, B. Eurozone Dystopia. Group Thinking and Denial on a Grand Scale, Edward Elgar (2015)
We kindly thank the author for allowing Lexit to publish this piece, as well as Scott Fergurson and Official Sworn Tanslators (Stierleandco.) for editing