The stability of the Eurozone is back in the spotlight this week amidst Greece’s talks with its creditors—which seem to be going nowhere good. Some, like the UK, seem relieved at not having entered in such spurious monetary agreements. Others, like Germany and the IMF, seem desperate to convince the Greeks to do something, anything, to begin reforms that will enable them to pay their debts. But the Greeks are keen on pushing the issue past the breaking point—after all, there’s too much at stake for everyone to let Greece fail. Markets have barely budged lately and do not seem at all worried, and the ECB has been replenishing daily its supply of emergency liquidity for Greek banks.
The Economist has recently compared the Eurozone’s game of cat-and-mouse with Britain’s political turmoil after the Great Depression. Then the choice was between spending cuts and an exit from the gold standard, followed by the collapse of the world monetary system; today it is between spending cuts and an exit from the Eurozone, followed perhaps by a breakdown of the monetary union. What the British wanted at the time was to stay on the gold standard—as part of their national pride—and keep inflating the supply of money and increasing welfare spending. Much like Greece wishes to continue in the monetary union without making any compromise. The Economist writes:
It is all reminiscent of the position facing Britain’s Labour party in 1931; with central bank reserves falling, the City insisted on cuts to unemployment benefit in order to restore confidence and allow sterling to stay on the gold standard. A divided cabinet refused to push through cuts on the scale required, but Labour’s leader, Ramsay MacDonald, took office at the head of a “national government”, that was dominated by the Conservatives. Not long afterwards, Britain went off the gold standard anyway.
Rothbard commented on this moment in history by showing the implications it had for the future of the international monetary system:
How could the British try to have their cake and eat it at the same time? By establishing a new international monetary order which would induce or coerce other governments into inflating or into going back to gold at overvalued pars for their own currencies, thus crippling their own exports and subsidizing imports from Britain. This is precisely what Britain did, as it led the way, at the Genoa Conference of 1922, in creating a new international monetary order, the gold-exchange standard (Rothbard 2010, 94).
Luckily for Greece, this international monetary order—which was initiated at Genoa, cemented at Bretton Woods, and given full powers after the Smithsonian agreement—is now in place. The British solution of the 1930s has also led to the creation of the Bretton Woods institutions, like the IMF, which have allowed and enabled a reckless Greek administration to get to this point. The advocates of deficit spending have long won the popularity contest—a contest that perhaps Alexis Tsipras, the Greek Prime Minister, is poised to win once more—demonstrating that in the history of monetary matters, little ever changes when it comes to inflation. Now, however, the international monetary order has hit rock bottom, and there is no longer any worse alternative to fall back on. The Eurozone and the world monetary system now live on borrowed time—borrowed, no doubt, from institutions like the IMF.
Mises, in characteristic fashion, foresaw this course events and predicted the disastrous effects of these international monetary institutions and arrangements when such proposals were still in their infancy:
What the British plan inadequately calls a “Clearing Union” would be, in fact, a bank with the power to expand credit. The very establishment… would consist of a huge addition to the then-existing amount of bank deposits subject to check. According to the British plan, each member state shall have assigned a quota that will determine its right to enjoy the credit facilities of the union. Where do these quite arbitrarily determined credit facilities come from?
The answer is obvious: They are fiat money, begotten by the magic of international planning. What the people need is a greater supply of goods, but the sorcerers want to give them more fictitious money… it is beyond doubt that the operation of this union or fund would result in a world inflation on an unprecedented scale (Mises 2000 [1944], 112).
