Wednesday, June 6, 2012

My Letter to National Review Magazine re: The Real Cause of the Euro Debt Crisis

Subject: The Real Cause of the Euro Debt Crisis
Date: Wed, 6 Jun 2012 10:58:32 -0400

Dear Sirs:
In his essay "Four Kinds of Dreadful", John O'Sullivan discusses the possible outcomes of the Greek debt crisis (which really is a euro debt crisis). It is important that readers understand the cause of the crisis. Mr. O'Sullivan repeats some common misconceptions about that cause when he states that:

"Its original design was flawed because it sought to include too many countries with too-diverse economic characters and histories, too-different levels of unemployment, and so on." He later states that "Above all, the euro zone did not include...transnational labor mobility; and transnational monetary transfers." And finally, that "a single currency required a single budget, a single treasury, and a single fiscal policy."

None of these reasons is the cause of the crisis. First of all, there is nothing to prevent people with different characters, etc. from adopting a common currency. Here in the US we have many people with different characters, different levels of productivity, etc. all using the dollar. There may indeed be cultural barriers to labor mobility, but several nations with different cultures have adopted the dollar as their national currency. Finally, all fifty states of the union use the dollar, without requiring that they meld their budgets, treasuries, and fiscal policies.

The real cause of the euro debt crisis has been explained by Dr. Philipp Bagus of King Juan Carlos University in his book, The Tragedy of the Euro. Dr. Bagus explains that the European System of Central Banks did not eliminate national central banks. These national central banks buy their respective country's sovereign debt and use that debt as collateral for euro loans at the European Central bank. The result is predictable. All seventeen members of the European Monetary Union have the ability to monetize their government's sovereign debt and force monetary inflation on the rest of the members. It is similar to having seventeen counterfeiters trying to outdo one another. First debt soared, and now inflation is being felt even in the more responsible nations such as Germany, because all use the euro.

There is no solution to this problem, as the euro is currently constructed. Fiscal treaties to prevent the inevitable money printing will be ignored, since there is no enforcement mechanism. Furthermore, there never will be an enforcement mechanism, because the seventeen members are sovereign nations with electorates that must be mollified. The euro was doomed from the day it was born.

Patrick Barron