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The Austrian School Returns to Europe

The Tragedy of the Euro by Philipp Bagus
03/31/2011Andy Duncan

The world center of gravity of the Austrian-economics movement has long been the United States, especially since Ludwig von Mises arrived there on August the 3rd, at the age of 58, in a turbulent 1940.

The 1998 Spanish publication of Money, Bank Credit, and Economic Cycles, by Jesús Huerta de Soto — followed by the English translation in 2006 — then helped to revive European claims of an Austrian equality with the United States. This is reinforced by the trans-Atlantic returns of Hans-Hermann Hoppe and Guido Hülsmann, after long periods of residence in North America.

In particular, a burgeoning growth of the Spanish echelon of the global Austrian movement — initially under the wing of Professor Huerta de Soto — may be starting to prove that a few years in the United States is becoming an option, rather than a requirement, for an Austrian academic to be taken seriously as a heavyweight intellectual force.

Thus we discover the rising talent of Philipp Bagus, and the publication of his landmark book, The Tragedy of the Euro.

This brilliant monograph, written in crisp classical English, flows like a rising tide.

It begins with a description of the rise of the European Union, which was always a dialectic, claims Bagus, with four classical-liberal freedoms of movement on one side of a divide; these liberal freedoms covered goods, capital, people, and the provision of services. These four virtues then clashed up against the many vices of socialism, and particularly the desire for new imperial satrapies, especially given the WWII fall of European colonial empires and their replacement by the all-embracing and invisible empire of the American government, particularly after the Suez crisis.

Just before his first chapter, "Two Visions for Europe," Bagus removes his gloves and goes straight for the throat, in the best uncompromising style of Mises himself; this is perhaps a delight to all of the writers at The Daily Bell, in Switzerland:

In reaction to the [recent financial] crisis, the political class has tried desperately to save the socialist project of a common fiat currency for Europe.

Once he has established his grip in this manner, Bagus refuses to let go throughout the entire book. Essentially, he claims that the fundamental schism at the heart of the EU project is one of a classical-liberal, Roman Catholic Church model engaged in a do-or-die struggle with a socialist Roman Empire model. From its Capitoline Hill inception in Rome, in 1957, upon the very site of the Temple of Jupiter Optimus Maximus, the EU project has thus always been doomed to be one of conflict and strife, driven by a perpetually unsatisfactory compromise between these two bitter rival forces of the human condition: liberty and tyranny.

On top of this conflict comes the later antagonism between the Austrian-influenced postwar Germans and their economic miracle, combined with the Saint-Simonian-socialist French and their desire to rebuild the empire they had lost when the Wehrmacht crushed their Napoleonic republic in 1940 (a military conflict in which Mises himself was swept up as he managed somehow to keep just one bus journey ahead of the panzers on his terrifying road to New York). Bagus is uncompromising:

The real reason the German government, traditionally opposed to the socialist vision, finally accepted the Euro, had to do with German reunification. The deal was as follows: France builds its European empire and Germany gets its reunification. It was maintained that Germany would otherwise become too powerful and its sharpest weapon, the Deutschmark, had to be taken away — in other words, disarmament.

After this first layer of his intellectual pyramid is built, Bagus delves into "The Dynamics of Fiat Money," his next chapter. In a Michelin-starred culinary mix of monetary history, contemporary politics, and Austrian economics, Bagus makes a bold prediction:

Governments started to get heavily involved in banking. Unfortunately, interventions are a slippery slope, as Mises pointed out in his book, Interventionism. Government interventions cause problems from the point of view of the interventionists themselves: begging for additional interventions to solve these additional problems, or the abolition of the initial intervention. If the course of adding new interventions is chosen, additional problems may arise that demand new interventions and so on. The road of interventions was taken in the field of money, finally leading to fiat money and the Euro. The Euro begs for political centralization in Europe. The end result of monetary interventions is a world fiat currency.

God forbid that should happen, though the world elites may try it on with us for a while before that power grab collapses too, just as their precursor fiat currencies are collapsing today in the face of their endless money printing to bail the elites out from a gigantic mess of their own greed-fueled creation.

After explaining this end-game strategy, Bagus details how we got to this point, in one of the clearest expositions of the Austrian business-cycle theory that I have ever read. Indeed, he leads us toward the intriguing idea that the intertwining of central banking and fiat currency, with expansive state war, epitomized by both world wars, is much more than a coincidence:

After the collapse of Bretton Woods, the world was dealing in fluctuating fiat currencies. Governments could finally control the money supply without any limitations to gold, and deficits could be financed by central banks. The manipulation of the quantity of money has only one aim: the financing of government policies. There is no other reason to manipulate the quantity of money.

Yes, the diamond-hard spirit of Mises is alive and well and living in the home of Francisco de Vitoria and the other Spanish Scholastics, from which Mises and the other early Austrians, such as Menger, also drew much inspiration.

But one impregnable bastion still stood between the nascent world-government elites and their rotten self-serving dream of unlimited money printing and a world Soviet financial gulag — which in my opinion is a hopeless dream anyway, as it will quickly go the way of the Soviet Empire. And that bastion was the postwar German Wirtschaftswunder (economic miracle) of Konrad Adenauer and Ludwig Erhard, and the semigranite rock upon which this economic miracle was built, the German Bundesbank.

Yes, although the Bundesbank did inflate its currency like all other central banks, its intimate knowledge of the consequences of Weimar caused it to inflate a lot less than the rest, with perhaps its only rival in fiat-currency hardness being the Swiss National Bank. Bagus explains how the destruction of this bastion was approached, in his third chapter, "The Road Toward the Euro":

Not surprisingly, governments and central banks wanted to escape the "tyranny" of the Bundesbank. The system finally failed. The declaration of surrender was made when the [European Monetary System] corridor was amplified to ±15 percent in 1993. The Bundesbank had won; it had forced the others to declare the bankruptcy. It had followed its hard money philosophy and not succumbed to the pressure of other governments. Anyone who inflated more than the Bundesbank was showing its citizens a weak currency. The Deutschmark, in turn, was respected throughout the world and very popular among Germans. It brought relative monetary stability not only to Germany, but to the rest of Europe as well. The Deutschmark, of course, only looked stable in comparison to the rest. It itself was highly inflationary and lost nine tenths of its purchasing power from its birth in 1949 to the end of the EMS.

Of course, this begs a simple question about all of the various intellectual pygmies who call themselves "servants of the people" within the various European governments. If they truly wished to serve their peoples — rather than serve themselves as masters — then instead of being jealous about German financial success and the relative prosperity of the German people, they should simply have copied German policies rather than deriding the Bundesbank for being too effective.

In fact, Bagus makes this point clear in the final paragraph of his second chapter:

If Europeans had just wanted monetary stability and a single currency in Europe, Europe could just have introduced the Deutschmark in all other countries. But nationalism would not allow for this. With a single currency, there were no embarrassing exchange rate movements that would reveal a central bank's inflating faster than its neighbors. For the first time there was a centralized money producer in Europe that could help to finance government debts, and open new dimensions for government interventions, and redistribution of wealth.

However, the "problem" remained of how to get the German people to give up their "evil" independent Bundesbank and its relatively honest-money policies? Obviously, German politicians would go along with the plan. Exploitative elites in different countries have always felt more at home with other exploitative elites, rather than with the exploited hoi polloi who pay the taxes to make their lives comfortable, who share merely a language and a physical geography with ruling elites, rather than the same attitude toward life; the politicians and civil servants of our current EU may require translators — if they lack fluency in the lingua franca of English — but they get on much better with each other at their cloistered conferences than they do with their respective peasant rabbles beyond the gates.

This is the trick Bagus believed the elites settled upon:

The implicit blaming of Germany for World War II and making gains as a result was a tactic that the political class had often used. Now the implicit argument was that because of World War II and because of Auschwitz in particular, Germany had to give up the Deutschmark as a step toward political union. Here were paternalism and a culture of guilt at their best.

Indeed, you may have noticed yourself that for several years it almost became a rite of passage for world-elite members to make the required pilgrimage to Auschwitz, to really nail the point home, with Gordon Brown, of course, being several years too late.

More, however, was needed than the promised removal of a continual drip-feed of collective guilt (as if people born decades after WWII should ever really consider themselves blameworthy for what other people did before they themselves were alive). The endless drone about Auschwitz was the stick; but what about a carrot to sweeten the bitter pill of the euro?

This was constructed in the form of the Stability and Growth Pact, in which other, non-German, members of the eurozone would be forced to jump rigorous financial hurdles and to pass continuing acid tests. This was in order to prevent the Mediterranean La Dolce Vita lifestyle — fueled by the printing presses of the peseta, the lira, and the drachma — from diluting the iron-hard rules of the soon-to-be-ex-Bundesbank.

It was all a despicable sham, of course, and nobody believed any of it, especially the lying politicians of Germany, even when it was being put together. But as they say with the eternal hope of marriage; proceed in haste and repent at leisure. The German people were thus hoodwinked into giving up their precious Bundesbank, which had served them so well since 1948:

The Stability and Growth Pact was not as harsh as Theo Waigel had suggested. When the SGP was finally signed in 1997 it had lost most of its disciplinary power. The result prompted Anatole Kalteksky to comment in The Times that the outcome of the Treaty of Maastricht represented the third capitulation of Germany to France within the century, citing as well the Treaty of Versailles and Potsdam Agreement.

As Mark Twain said, history usually fails to repeat itself, but it does often rhyme.

Moving into his fourth chapter, "Why High Inflation Countries Wanted the Euro," Bagus gets much more technical and produces lots of charts and graphs to detail and highlight his developing thesis. He does, however, continue in the same refreshing Misesian vein within the text:

Governments of Latin countries, and especially France, regarded the Euro as an efficient means of getting rid of the hated Deutschmark. Before the introduction of the Euro, the Deutschmark was a standard that laid bare the monetary mismanagement of irresponsible governments.

In the fifth chapter — "Why Germany Gave Up the Deutschmark" — Bagus drills deeper into the cunning plan to part the German people from their wealth and their independence, via the machinations of their rapacious and power-hungry politicians eager to seek further baubles from the EU bureaucracy and a luxurious financial independence from their rotten capricious voters.

The Bundesbank thus had to be destroyed to allow the dreams of Keynesians within governments everywhere to flourish and prosper:

Mitterand, France's president from 1981–1995, had hated Germany in his youth and despised capitalism. The French patriot was a staunch defender of the socialist vision of Europe and geared his policies toward defending France against the economic superiority of its Eastern neighbor. Germany's superiority was based on its currency. Mitterand's intention was to use Germany's monetary power for the interest of the French government.

So, a relationship built on love and trust then. It was surely bound to last.

Of course, the plan would never have worked without the duplicity of German politicians:

The Euro allowed German politicians to rid themselves of stubborn Bundesbankers, promising the end of the bank's "tyranny." More inflation would mean more power for the ruling class. German politicians would be able to hide behind the ECB and flee the responsibility of high debts and expenditures.

As you might say in a high-quality jazz club after listening to a particularly dense and interwoven melody, "Nice."

Bagus finishes his fifth chapter with a summation of what the euro has really been about all along:

In sum, the introduction of the Euro was not about a European ideal of liberty and peace. On the contrary, the Euro was not necessary for liberty and peace. In fact, the Euro produced conflict. Its introduction was all about power and money. The Euro brought the most important economic power tool, the monetary unit, under the control of technocrats.

Bagus is particularly scathing about the political gnomes and bureaucratic dwarves of the various exploitative tax-eating classes, who are currently trying to rescue their own miserable political careers by wrecking the economic futures of their exploited tax-paying classes. For instance, he has a lot to say about that quisling betrayer of the German people, Angela Dorothea Merkel:

Merkel herself stated that: "If the Euro fails, the idea of European integration fails." Her argument is a non sequitur. Naturally, one can have open borders, free trade and an integrated Europe without a common central bank. Here Merkel showed herself to be a defender of the socialist version of Europe.

The rest of the book then contains a brilliant and detailed analysis of the relationship between the Federal Reserve and the European Central Bank, and the political interconnections between the two, as well as an up-to-date breakdown of how the euro crisis has developed over the last three years. Bagus also explains how the ECB is stoking up the fires of future European conflict in its bid to help the EU create a straitjacket, force-majeure political union.

At the end of his tenth chapter, "The Ride Toward Collapse," Bagus neatly summarizes the current situation after an interesting discussion of the concept of "qualitative easing." the evil twin of "quantitative easing":

The European Union has become a transfer union. Interest rates that most governments have to pay on their debts remain at a high level. Sovereign-debt levels are still on the rise. The future will tell us if the situation was sustainable.

In the next chapter, "The Future of the Euro," Bagus clearly and succinctly answers the following set of questions:

Have we already reached the point of no return? Can the sovereign debt crisis be contained and the financial system stabilized? Can the Euro be saved? In order to answer these questions we must take a look at the sovereign debt crisis, whose advent was largely the result of government interventions in response to the financial crisis.

No stone is left unturned, as they say, though Bagus does it in as few words as possible.

In summation, most living Austrian authors fall into one of three broad camps; the Misesian traditionalists, the Hayekian cerebralists, or the Rothbardian essentialists. I can only say that if forced to pick one of the three, I believe the spirit of Mises still lives on within the pen of Bagus. For example, was this written by Mises or Bagus? (The clue is in the last sentence):

As Austrian business-cycle theory explains, the credit expansion of the fractional-reserve-banking system caused an unsustainable boom. At artificially low interest rates, additional investment projects were undertaken even though there was no corresponding increase in real savings. The investments were simply paid by new paper credit. Many of these investments projects constituted malinvestments that had to be liquidated sooner or later. In the present cycle, these malinvestments occurred mainly in the overextended automotive, housing, and financial sectors.

Or is the style of Bagus a combination of all three broad camps plus something new? Are we going to have to invent a new term, such as "Bagusian," to create an evolving fourth camp? If we get three books of this quality, in sequence, then I feel we may be forced to deploy such a term.

To wrap up, in his conclusion, Bagus outlines all of the various possible futures he believes the euro might have. Its outcome is in the lap of the Gods, he thinks, though he outlines one or two of the more likely predictions and why he thinks these will be favorites with the bookmakers.

I will let you download, buy, or in some other way imbibe this required-reading book to find out what the details of these predictions are. However, I think we all know the general conclusion; all fiat monies ultimately end up as worthless. The interesting part of the story is how they get there.



Andy Duncan

Andy Duncan is an expert on financial derivatives and lectures on the topic in New York, London, Dubai, and Singapore. He’s also been a writer, speaker and contributor to the Cobden Centre, Gold Money, and Casey Research. Andy is a dedicated Austrian Anarcho-Capitalist, with a jaundiced eye for UK socialism and UK politics.