Monday, December 31, 2012

Currency Issuers and Users - Euro

Bishop John Shelby Spong is one of my favorite writers and progressive thinkers. Recently my friend Don called my attention to a recent weekly letter by the Bishop reporting on a trip to Europe with comments on its economy. Only recently would I have found the temerity to lecture the supreme lecturer. But, I did with the following comment on his website.


Your interesting essay might have shed a different light on austerity in Europe had you appreciated the difference between a currency issuer like the US, UK, Sweden, and Hungary and a currency user, as are the states in the European Monetary Union.

After President Nixon took us off the gold standard in 1971, all major countries have had fiat currencies with floating exchange rates. In the early 1990s a growing community of heterodox economists centered at the University of Missouri Kansas City have been studying how a fiat monetary system functions. This community foresaw the trouble in the EMU as it was being constructed in the mid 90s, it foresaw the current global recession, it explains why the S&P downgrade of US debt was a non-event, and why the Fed's quantitative easing has been ineffective. The insights of this community provide some perspective on your observations in Europe.

The UK has imposed austerity on itself consistent with the neoliberal dogma dominating current global economic practice. And, it is suffering the inevitable consequences as you observed. A currency issuer unlike a household, business, or US state government has the policy latitude to deficit spend until the unemployed productive resources are fully employed. It can do this counter-cyclicly to normal business cycles to maintain a healthy economy. The UK is unnecessarily causing human suffering throughout the land.
Euro is not a sovereign currency

Members of the EMU do not have this policy latitude. As users of their currency, they are under a de facto gold standard where the euro takes the place of gold. To obtain euros they must either borrow them or be net exporters in trade with other euro nations. The members of the EMU have given up their monetary but not their political sovereignty. So, unlike states in the US, there is no avenue for a central government to share the prosperity of the whole for the common good.

Germany has reigned as the dominant mercantilist exporting to the other EMU nations, thereby enriching itself at the expense of the others. Now Germany is reluctant to take its boot off their necks and is imposing, along with the IMF, draconian austerity with the inescapable results - high unemployment especially among the youth, severe human hardship, falling GDP, and increasing deficits. The political unity once expected from the monetary alliance has not yet developed and might be threatened by increasing civil unrest.

The antidote to the depression is expansion of the monetary base to employ the unemployed. The European Central Bank, which issues the euro, could issue euros (the equivalent to mining gold) to relieve the crisis, if its charter permitted it. Such action would tend to be inflationary in regions of nearly full employment. Germany, having suffered the Weimar hyperinflation, will have nothing to do with the slightest hint of inflation.

So far, the ECB has kept the lid on debt defaults by purchasing member state bonds to keep interest rates from exploding disastrously as only a central bank can do. However, its charter and Angela Merkel are making sure that it can’t do more. The EMU states may muddle through after a long time, if civil unrest does not intervene Arab-spring style or worse.

You rightly observe that there is little difference in the plight of EMU states between those with conservative or liberal governments. Neither has much policy discretion, and like here in the US, the difference between conservative and liberal economics is the intensity of their devotion to austerian dogma. They are both basically and unfortunately neoliberal.

As one who has put religious myths in proper perspective, you might enjoy ongoing efforts to do the same with economic myths that are causing worldwide suffering and forestalling progressive objectives.


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