Podium - the Euro Will Lead to European Union Otmar Issing from the Hayek Lecture Delivered at the Institute of Econo Mic Affairs by a Member of the European Central Bank Board

Article excerpt

AS A young student I read The Road to Serfdom. It was the first book written by Hayek I came across, and it has left a deep influence on me. Only 11 years after the Hitler regime and the war, I suddenly started to understand the interdependence between totali- tarianism and economic policy. Since then I have read most of Hayek's publications.

Hayek held some strong views on Monetary Union in Europe, an idea that was still only in a rather embryonic stage when he commented on it in 1978. His own scheme of competing currencies seemed to him "both preferable and more practicable than the utopian scheme of introducing a new European currency, which would ultimately only have the effect of more deeply entrenching the source and root of all monetary evil, the government monopoly on the issue and control of money".

The proposal put forward by Hayek, that is, full competition between private issuers of currency, is an extremely interesting concept. The basic idea seems to be as follows: creating the possibility of banks issuing currency would open the way to competition. The currencies of different banks would trade at variable exchange rates. Competition and profit maximisation would lead to an equilibrium in which only banks paying a competitive return on liabilities could survive. Only currencies guaranteeing a stable purchasing power would exist. Banks that failed to build up such a reputation for their currency would lose customers and be driven out of business. How would Hayek, if he were alive today, see EMU and the ECB? Let me hazard what is probably a somewhat biased and speculative answer. The route to monetary union taken by member governments and central banks was almost diametrically opposed to that espoused by him in his later writings. But should he not welcome what we have achieved? I am convinced that he would welcome the fact that the ECB has not joined the new, fashionable wave arguing that money does not matter. It is very easy to slip into the trap of thinking that money is unimportant when inflation is low, and to ignore the overwhelming evidence that all past episodes of persistent inflation have been preceded, or been accompanied, by rapid money growth. Since inflation is ultimately a monetary phenomenon, money constitutes a natural, firm and reliable "nominal anchor" for a monetary policy aimed at price stability. …