The Euro versus Currency Competition

Article excerpt

It is now four years since the euro was introduced as a circulating currency in parts of the European Union. Both Europeans and others are becoming increasingly used to a single money in much of the continent. If the euro remains in use for another five or ten years people may well look back at the multiple European currencies of the twentieth century as some strange archaic arrangement.

Such an attitude would be unfortunate because there are good reasons for considering the imposition oí the euro a step backwards from progressive reform and economic liberalization. It is now generally accepted that socialism does not work and that decentralized competitive market decision-making is a far more effective and productive way of arranging economic activities.

In contrast the euro represents an institutional change toward greater monetary central planning. It reduces the ability of ordinary citizens to easily escape from harmful monetary policies by shifting income and wealth into an alternative currency for safekeeping. Yes, there is still the dollar and the yen and the pound. But that does not change the fact that the field of significant competing currencies has been seriously narrowed through the imposition of the euro.

Of course, the euro's advocates emphasize the value of a single money in radically reducing the cost of doing business throughout an increasingly integrated European community. And some EU member nations, wishing once again to compete with the United States in international affairs, view the euro as an important political tool against the dollar.

We need to remind ourselves that central banking is a form of central planning. A central bank possesses monopoly control of the money supply. It determines the quantity of money in circulation and therefore influences the value, or purchasing power, of the monetary unit. It can also influence (at least in the short run) some market rates of interest, which may affect the amount and direction of investment.

Throughout the twentieth century, governments frequently used their central banks to finance budget deficits through money creation - and of course they continue to do so in the 21st century when it serves their purposes. The end-products of such monetary mischief have been prolonged periods of price inflation, which eat away at people's accumulated wealth; distorted market prices resulting in imbalances between savings and investment, and supply and demand; and disincentives for long-term business planning and capital formation.

Why is the euro a less attractive monetary regime than the preceding system of national currencies? About 30 years ago the Austrian economist and Nobel laureate F. A. Hayek delivered a lecture at a conference in Switzerland, later published as Choice in Currency: A Way to Stop Inflation. Hayek explained that due to the influence of Keynesian economics over monetary and macroeconomic policy, governments were invariably guided by short-run goals in the service of special-interest groups. The consequence was the constant abuse of the printing press, with its resulting price inflation, to feed the seemingly insatiable demands of those privileged and politically influential groups.

Hayek concluded that some method had to be found to free ordinary citizens from the government's monopoly control of the medium of exchange. The answer, he suggested, is to allow them to use whatever money they choose. Hayek said:

There could be no more effective check against the abuse of money by the government than if people were free to refuse any money they distrusted and to prefer money in which they had confidence. Nor could there be a stronger inducement to governments to ensure the stability of their money than the knowledge that, so long as they kept the supply below the demand for it, that demand would tend to grow. Therefore, let us deprive governments (or their monetary authorities) of all power to protect their money against competition: if they can no longer conceal that their money is becoming bad, they will have to restrict the issue. …