Wednesday, August 29, 2012

ECB president Draghi does not understand the problem with the euro

From today's Open Europe news summary:
Draghi: A United States of Europe is not the solution to the eurozone crisis

Writing in Die Zeit today, ECB President Mario Draghi argues that the current “solutions offer binary choices: either we must go back to the past, or we must move to a United States of Europe. My answer to the question is: to have a stable euro we do not need to choose between extremes.” Draghi suggests that a new architecture is needed, with Germany remaining the “anchor of a strong currency”, but that a political union is not a prerequisite, adding “economic integration and political integration can develop in parallel”. Draghi suggests a model based on fiscal responsibility, combined with financial regulation and oversight, arguing, “This is not the end, but the renewal of the European social model.” Draghi concludes, “Those who want to go back to the past misunderstand the significance of the euro. Those who claim only a full federation can be sustainable set the bar too high. What we need is a gradual and structured effort to complete EMU.ECB Press release

ECB president Draghi does not understand that the problem with the euro is that it is a classic "tragedy of the commons", as explained by Dr. Philipp Bagus in The Tragedy of the Euro. Each country in the EMU can print euros by the "backdoor" method of using worthless sovereign debt as collateral for euro-denominated loans from the ECB. There is no mechanism to prevent this from happening. So the EMU is composed of seventeen countries who are vying with one another to print euros. As with any commonly held resource, the euro will be plundered to extinction. The true tragedy is that the liberal European project of free trade, free mobility of workers, and free transfers of capital is threatened by the unnecessary euro project.

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