The TRAGEDY
of the EURO

PHILIPP BAGUS

SECOND EDITION

MISES

INSTITUTE

© 2010 Ludwig von Mises Institute
© 2011 Terra Libertas
© 2012 Ludwig von Mises Institute

Ludwig von Mises Institute
518 West Magnolia Avenue
Auburn, Alabama, 36832, U.S.A.
Mises.org

ISBN: 978-1-61016-249-4

To Eva

1.Three month monetary rates of interest in Germany, Greece, Spain, Ireland, Italy, and Portugal (1987–1998)

2.Competitiveness indicators based on unit labour costs, for Mediterranean countries and Ireland 1995–2010 (1999Q1=100)

3.Competitiveness indicators based on unit labour costs, for Belgium, The Netherlands, Austria, and Germany 1995–2010 (1999Q1=100)

4.Balance of Trade 2009 (in million Euros)

I would like to thank Daniel Ajamian, Brecht Arnaert, Philip Booth, Brian Canny, Nikolay Gertchev, Robert Grözinger, Guido Hülsmann, and Robin Michaels for helpful comments and suggestions on an earlier draft, Arlene Oost-Zinner for careful editing, and Jesús Huerta de Soto for writing the foreword. All remaining errors are my own.

by Jesús Huerta de Soto

It is a great pleasure for me to present this book by my colleague Philipp Bagus, one of my most brilliant and promising students. The book is extremely timely and shows how the interventionist setup of the European Monetary system has led to disaster.

The recent crisis of the Eurosystem has shaken financial markets and governments. The Euro has depreciated strongly against other currencies at a pace worrisome to political and financial elites. They fear losing control. The monthly bulletin of the European Central Bank (ECB), published in June of 2010, acknowledges that the European banking system was on the brink of collapse in the beginning of May. Several European governments, including France, were on the verge of default.

There has been a fight between the advocates of two different ideals from the beginning of the European Union. Which stance should it adopt: the classical liberal vision, or the socialist vision of Europe?

In order to understand the dynamics of the Euro, we have to delve into the history of money itself. Money, i.e., the common and generally accepted medium of exchange, emerged as a means to solve the problem of the double coincidence of wants. The problem of the double coincidence of wants consists in the problem of finding someone who owns what we want, and at the same time, wants what we have to offer.

The Werner plan had been the first attempt to establish a common fiat currency in Europe. It was drawn up by a group surrounding Pierre Werner, Prime Minister of Luxembourg, and presented in October of 1970. The plan entailed three stages and called for a monetary union by 1980. In stage one, budgetary policies were coordinated and exchange rate fluctuations were reduced. The third stage fixed exchange rates and converged economic policies.