The Tragedy of the Euro

CHAPTER TWO The Dynamics of Fiat Money

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. At some point in history some individuals discovered that they could satisfy their ends in a more efficient way: if they did not demand the goods that they needed directly, but rather goods that were more easily exchangeable. They used their production to demand a good that they would use as a medium of exchange; to buy, in an indirect way, what they really wanted.

A hunter, for instance, does not exchange his meat directly for the clothes he needs because it is difficult to find a cloth producer who needs meat right now and is willing to offer a good price. Rather, the hunter sells his production for wheat that is more marketable. Then, he uses the wheat to buy the clothes. In this way, wheat acquires an additional demand. It is not only demanded as a consumer good to eat or as a factor of production in farming, but also to be used as a medium of exchange. When the hunter is successful with his strategy, he may want to repeat it. Others may copy him. Thus, the demand for wheat as a medium of exchange rises and becomes more widespread. As the use of wheat as a medium of exchange becomes more widespread, it becomes ever more marketable and attractive to use it as such.

There may be other competing media of exchange at the same time. In a competitive process, one or a few media of exchange become generally accepted. They become money. In this competitive process, some commodities prove to be more useful to fulfil the function of a good medium of exchange and a store of value. Precious metals like gold and silver became money. In retrospect, it is not difficult to see why: gold and silver are homogeneous, resistant, of great value and strongly demanded, as well as easy to store and transport.

ENTER BANKS

When banks arose anew in the Renaissance in Northern Italy, gold and silver were still the dominant media of exchange. People used precious metals in their daily exchanges and when they deposited their money with banks, banks were paid for safekeeping and held one hundred percent reserves.1

Depositors would go to bankers and deposit a hundred grams of gold for safekeeping in a demand deposit contract. The depositor would then receive a certificate for his deposit which he could redeem at any time. Gradually these certificates started to circulate and were used in exchanges as if they were gold. The certificates were only rarely redeemed for physical gold. There was always a basic amount of gold lying around in the vault that was not demanded for redemption by clients. Consequently, the temptation for bankers to use some of the deposited gold for their own purposes was almost irresistible. Bankers often used the gold to grant loans to clients. They would start to issue fake certificates or create new deposits without having the gold to back them up. In other words, bankers started to hold only fractional reserves.

ENTER THE STATE

Governments started to get heavily involved in banking. Unfortunately, interventions are a slippery slope, as Mises in his book, Interventionism,2 has pointed out. 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 a political centralization in Europe. The end result of monetary interventions is a world fiat currency.

The first intervention of governments into money was the monopolization of the mint; then came coin debasement. Governments would collect existing coins, melt them and reduce the content of precious metal in them, and cash in on the difference.

Profits made from the monopoly of the mint and reducing the quality of existing coins were considerable and turned the attention of government to the area of money. But coin debasement was a rather clumsy way of increasing government budgets. Banking had more potential, and provided a more sinister means of increasing government funds. Governments started to work together with bankers and become their accomplices. As a first favor to banks, governments did not enforce private legal norms for deposit contracts.

In a deposit contract, the obligation of the depository is to hold, at all times, a hundred percent of the deposited stuff or its equivalent in quantity and quality (tantundem). This implies that bankers have to hold one hundred percent reserves for all deposited money. Governments failed to enforce these laws for banks and to defend the property rights of depositors. Governments looked aside and ignored the problem. Finally, they even legalized the existing practice officially and allowed for ambiguous contracts. Effectively, banks got the privilege of holding fractional reserves and creating money. They could create “gold certificates” and deposits on their books even though they did not have the corresponding physical gold in their vaults.

Unbacked “gold certificates” and deposits are called fiduciary media. The privilege of producing fiduciary media was given to banks in exchange for strong cooperation with governments. In fact, governments looked away in the beginning when banks dishonored their safekeeping obligations because the newly created fiduciary media were given to governments in the form of loans. This cooperation between banks and governments continues until today and is illustrated in the forms of social and leisure contact of all sorts, support in times of crisis, and finally, in the form of bailouts.

THE CLASSICAL GOLD STANDARD

The gold standard reigned from 1815 to 1914. This was a period during which most countries turned to the single use of gold as money; it is easier to control one commodity money than two. Thus, governments followed market tendencies toward one generally accepted medium of exchange. The different currencies like the mark, pound or dollar, were just different terms for certain weights of gold. Exchange rates were “fixed.” Everyone was using the same money, namely gold. Consequently, international trade and cooperation increased during this period.

The classical gold standard was, however, a fractional gold standard and, consequently, unstable. Banks did not hold one hundred percent reserves. Their deposits and notes were not backed one hundred percent by physical gold in their vaults. Banks were always confronted with the threat of losing reserves and being unable to redeem deposits. Due to this threat, the power of banks to create money was restricted. Creating money meant substantial profits, but bank runs and the risk of losing reserves limited banks in their credit expansion. Money users posed a constant threat to bank liquidity, as they would still use gold in their exchanges and demand redemption, especially when confidence in banks faded. Also, other banks that accumulated fiduciary media (notes issued by other banks) could present them for redemption at the issuing bank, threatening its reserve base. Thus, banks had an interest in changing the standard.

A fractional gold standard poses yet another threat to banks. When banks create new money and lend it to entrepreneurs, there is an artificial downwards pressure on interest rates. By artificially reducing interest rates and expanding credits, the correspondence of savings and investments is disturbed. Additional and longer investment projects may be successfully completed only when savings increase. When savings increase, interest rates tend to fall, indicating to entrepreneurs that it is possible to engage in new, formerly submarginal projects that were not profitable at higher interest rates. Now they may be successfully completed; after all, savings have increased and more resources are available for their completion.

When, however, banks expand credit and artificially reduce interest rates, entrepreneurs are likely to be deceived. With lower interest rates, more investment projects seem to be profitable—even though savings have not increased. At some point, price changes make it obvious that some of these newly started projects are unprofitable and must be liquidated due to a lack of resources.3 More projects have been started than can be completed with the available resources. There are not enough savings. Interest rates fall due to credit expansion and not due to more savings. The purge of malinvestments is healthy; it realigns the structure of production and savings/consumption preferences.

During a recession, i.e., the widespread liquidation of malinvestments, banks normally get into trouble. Malinvestments and liquidations imply bad loans and losses for banks, threatening their solvency. As banks become less solvent, people start to lose confidence in them. Banks have a hard time finding creditors, depositors redeem their deposits, and bank runs are common. Consequently, banks become illiquid and often insolvent. Bankers became aware of these difficulties amid recessions, noting that difficulties were ultimately caused by their own creation of new money, and lending it at artificially low interest rates. They know that their business of fractional reserve banking has always been threatened by recurring recessions.

Bankers, however, do not want to forgo the profitable business of money production. Thus they demand government assistance (intervention). One great help for banks was and is the introduction of a central bank as a lender of last resort: central banks may lend to troubled banks to stem off panics. In a recession, troubled banks can receive loans from the central bank and thereby be saved.

Central banks provide banks with another advantage. They can supervise and control credit expansion. The danger of uncoordinated credit expansion is that more expansionary banks lose reserves to less expansionary banks. Redistribution of reserves is a danger if banks do not expand in the same tempo. If bank A expands faster than bank B, fiduciary media will find their way to bank B customers who present them at bank B for redemption. Bank B takes the fiduciary media and demands the gold from Bank A, which loses reserves.

If both banks expand at the same pace, however, customers will present the same amount of fiduciary media. Their mutual claims cancel each other out. The credit expansion lowers their reserve ratios, but banks do not lose gold (or base money) reserves to competitors. But without coordinated expansion there is the danger of reserve losses and illiquidity. In order to coordinate, they can form a cartel—but the danger always remains that one bank might leave the cartel, threatening the collapse of the others. The solution to this problem is the introduction of a central bank that can coordinate credit expansion.

By coordinating credit expansion, credit can expand further because the danger of reserve losses to other banks disappears. In addition, the existence of a lender of last resort fosters credit expansion. In troubled times, a bank may always be able to get a loan from the central bank. This safety net makes banks extend more credits. As the potential for credit expansion grows, so does the potential for booms and malinvestments.

Even with the introduction of central banks, governments did not have total power over money. While the banking system could produce fiduciary media, money production was still connected to and restricted by gold. People could still go to banks in a recession and demand redemption in gold. Even though gold reserves were finally centralized in central banks, these reserves could prove to be insufficient to forestall a banking panic and a collapse of the banking system. Consequently, the ability to expand credit and to produce money in order to finance the government directly and indirectly (via bond purchases by the banking system) was still limited by the link to gold. Gold provided discipline. The temptation, naturally, for both banks and governments was to gradually remove all connection between money and gold.

A first experience of this removal of gold came at the start of World War I. Participating nations suspended redemption into specie, with the exception of the United States, who joined the war in 1917. War participants wanted to be able to inflate without limits in order to finance the war. As a consequence, there was a short episode of flexible exchange rates for fiat paper currencies. In the 1920s many nations returned to the gold standard, e.g., Great Britain in 1926 and Germany in 1924. However, redemption into gold was only possible at the central bank in form of bullion (the system is, therefore, called a gold bullion standard). The small bank customer was unable to get his gold back. Gold coins disappeared from circulation. Bullion, in turn, was only used for large international transactions. Great Britain redeemed pounds not only in gold, but also in dollars. Other countries redeemed their currencies in pounds. The centralization of reserves and the reduced redemption into cash allowed for a greater credit expansion, causing greater malinvestments and cycles.

THE SYSTEM OF BRETTON WOODS

Redemption was suspended in many countries during the Great Depression. The chaos of fluctuating exchange rates and competing devaluations prompted the United States to organize a new international monetary system in 1946. With the Bretton Woods System, central banks could redeem dollars into gold at the Federal Reserve. Private citizens were no longer able to redeem their money into gold, not even at the central bank. They were effectively robbed of their gold. The gold became property of the central bank. In such a gold exchange standard, only central banks and foreign governments can redeem currencies with other central banks.

Under the Bretton Woods system, each currency stood in a fixed relationship to the dollar, and thereby to gold. The dollar became the reserve currency for central banks. Central banks used their dollar reserves to inflate their currency on top. In this next step in the interventionist path in the monetary field, it became even easier to create money during recessions to help banks—but not private citizens.

The Bretton Woods system led to its own destruction, however. The United States had strong incentives to inflate its own currency and export it to other countries. The US produced dollars to buy goods and services and pay for wars in Korea and Vietnam. Goods flew into the US in exchange for dollars. European countries such as France, Western Germany, Switzerland, and Italy followed a less inflationary monetary policy under the influence of economists familiar with the Austrian school of economics. The gold reserve ratio of the Fed was reduced and overvalued dollars accumulated in European central banks until Charles de Gaulle finally initiated a run, presenting French dollars for gold at the Federal Reserve. In contrast to France, and due to Germany’s military dependence on American troops, the Bundesbank agreed to hold on to the majority of its dollar reserves.4 As American gold reserves dwindled, Nixon finally suspended redemption in August of 1971. Currencies started to float in 1973. Interventionist dynamics had pushed the world to irredeemable fiat currencies. With fiat paper currencies, there is no link to gold and thereby no limit to the production of paper money. Credit expansion can continue because doors are open for unlimited bailouts of either the government or the banking system.

EUROPE AFTER BRETTON WOODS

After the collapse of Bretton Woods, the world was dealing in fluctuating fiat currencies. Governments could finally control the money supply without any limitation 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.

Indeed, virtually any quantity of money is sufficient to fulfil money’s function as a medium of exchange. If there is more money, prices are higher; and if there is less, money prices are lower. Imagine adding or subtracting zeros on fiat money notes. It would not disturb money’s function as a medium of exchange. Yet, changes in the quantity of money have distributional effects. The first receivers of new money can buy at the old, still low prices. When the money enters the economy, prices are pushed up. Later receivers of the new money see prices increase before their incomes increase. There is redistribution in favor of the first receivers/producers of the new money to the detriment of the last receivers of the new money—who become continually poorer. The first receivers of the new money are mainly the banking system, the government, and connected industries, while later receivers are that part of the population having less intimate contact with the government, for example, fixed income groups.

The new system of fiat currencies allowed almost unrestricted inflation of the money supply with huge redistribution effects. After the end of Bretton Woods, European banks inflated to finance expanding welfare states and subsidize companies. But not all countries inflated their currencies at the same pace. As a consequence, strong fluctuations in exchange rates negatively affected trade between European nations. As trade was negatively affected, the division of labor was also hampered, resulting in welfare losses. Politicians wanted to avert these losses; losses meant lower tax revenues. In addition, they feared that with a flight into real values, competitive devaluations and price inflation could get out of control. Companies and banks also dreaded this scenario. Moreover, fixed income receivers became upset when they saw their real income eroding. Savings rates decreased, reducing long term growth prospects.

Widely fluctuating exchange rates were the most important problem from the point of view of the political elite. European economic integration was in danger of falling apart. The four liberties of free movement of capital (foreign direct investments), goods, services, and people were in practice inhibited. Uncertainty caused by fluctuating exchange rates reduced movements severely. Moreover, fluctuating exchange rates were embarrassing for the faster inflating politicians and constituted a smoking gun. Politicians aimed, therefore, at a stabilization of exchange rates. But this was like putting a square peg in a round hole: fluctuating fiat currencies with diverging inflation rates cannot finance diverging government needs and provide stable exchange rates. Politicians wanted a way to coordinate inflation in the European Union that was similar to the ways of the fractional reserve banks, which must coordinate their expansion in order to maintain their reserve base.

The European Monetary System (EMS), which came about in 1979, was expected to be a solution for the coordination problem and an institutionalization of the former existing “snake.”5 It was a legal formalization of the previous existing system of currencies that were supposed to fluctuate within small limits. Politicians and big businesses interested in foreign trade had worked on it together as an attempt to control diverging inflation rates. France, Germany, Italy, Belgium, the Netherlands, Luxembourg, Denmark and Ireland all participated in this attempt to stabilize their exchange rates. Spain joined it after it entered the European Union in 1986. The system, however, was a misconstruction. There was no redemption into gold or any other commodity money. The EMS was built on paper.6

The EMS was also an attempt to restrain the hegemony of the Bundesbank with a relatively less inflationary monetary policy, and prevent it from stepping out of the line. The Banque de France is known to have internally discussed the “tyranny of the mark.”7 The French government had even wanted the EMS to include a pooling of central bank reserves, thereby obtaining access to German reserves. But this request was declined by Bundesbankers who were very sceptical about the whole project. After its creation, German chancellor Helmut Schmidt threatened to draft a law ending the bank’s formal independence if the Bundesbankers would not agree to the EMS.

The EMS tried to fix exchange rates that had been allowed to float in a corridor of ±2.25 percent around the official rate. But the intention of fixed exchange rates was incompatible with the system built to achieve that aim. The idea was that when the exchange rate would threaten to leave the corridor, central banks would intervene to bring the rate back into the corridor. For this to happen, a central bank would have to sell its currency, or in other words, produce more money when the currency was appreciating and moving above the corridor. It would have to buy its currency, selling assets such as foreign exchange reserves, if its currency was depreciating, falling below the corridor.

The Spanish Central Bank provides us with a good example. If the peseta appreciated too much in relation to the Deutschmark, the Bank of Spain had to inflate and produce pesetas to bring the peseta’s price down. The central bank was probably very happy to do so. As it could produce pesetas without limits, nothing could stop the Bank of Spain from preventing an appreciation of the peseta. However, if the peseta depreciated against the Deutschmark, the Bank of Spain would have to buy its currency and sell its Deutschmark reserves or other assets, thereby propping up the exchange rate. This could not be done without limits, but was strictly limited to the reserves of the Bank of Spain. This was the basic misconstruction of the EMS and the reason it could not work. It was not possible to force another central bank to cooperate, i.e., to force the Bundesbank to buy peseta with newly produced Deutschmarks when the peseta was depreciating. In fact, the absence of such an obligation was a result of the resistance of the Bundesbank. France called for a course of required action that would reduce the independence of the Bundesbank. Bundesbank president Otmar Emminger resisted being obliged to intervene on part of falling currencies in the EMS. He finally got his way and the permission from Helmut Schmidt to suspend interventions leading to the purchase of foreign currencies within the EMS agreements.8 Countries with falling currencies had to support their currencies themselves.

Indeed, an obligation to intervene in favor of falling currencies would have created perverse incentives. A central bank that inflated rapidly would have forced others to follow. Fiat paper currencies are introduced for redistribution within a country. Fixed fiat exchange rates coupled with an obligation to intervene allowed for redistribution between countries. In such a setup, the faster inflating central bank (Bank of Spain) would force another central bank (Bundesbank) to follow and buy up faster, inflating one’s currency. The Bank of Spain could produce pesetas that would be exchanged into Deutschmarks buying German goods. Later the Bundesbank would have to produce Deutschmarks to buy peseta and stabilize the exchange rate. There would be a redistribution from the slower-inflating central bank to the faster-inflating central bank.

Yet, in the EMS there was no obligation to buy the faster-inflating currency. This implied also that the EMS could not fulfil its purpose of guaranteeing stable exchange rates. Fixed fiat exchange rates are impossible to guarantee when participating central banks are independent. Governments wanted both fiat money production for redistributive internal reasons and stable exchange rates. This desire makes voluntary cooperation in the pace of inflation necessary. Without voluntary cooperation, coordinated inflation is impossible. The Bundesbank was usually the spoilsport of coordinated inflation. It did not inflate fast enough when other central banks, such as the Bank of Italy, inflated the money supply to finance Italian public deficits.

The Bundesbank did not inflate as much on account of German monetary history. A single generation had lost almost all monetary savings two times, namely, after two world wars: in the hyperinflation of 1923 and the currency reform in 1948. Most Germans wanted hard money, and expressed that through the institutional set up of the Bundesbank, which was relatively independent of the government. What all of this means is that, in practice, the EMS would only function if central banks were only able to inflate as much as the slowest links in the chain: the Bundesbank and its traditional ally, De Nederlandsche Bank.

Central banks produce money primarily to finance government deficits. Consequently, governments can only have deficits not larger than those of the soundest link in the chain—often the German government. The Bundesbank was the brakeman of European inflation: a hated corrective. It was widely regarded as uncooperative because it did not want to produce money as fast as other central banks. It forced other central banks controlled by their governments to stop when they wanted to continue, or forced embarrassing readjustments of the corridor through its stubbornness.9

In fact, there were several readjustments of the exchange rates in the EMS.10 The final crisis of the EMS occurred in 1992 when the Spanish peseta and the Irish pound had to readjust their exchange rates. The British pound came under pressure in the same year. After a critical interview on the pound given by the President of the Bundesbank, Helmut Schlesinger, the British government had to stop trying to stabilize the exchange rate and left the EMS. Famously, George Soros contributed to speeding up the collapse. The French Franc soon came under pressure as well. France wanted unlimited and unconditional support by the Bundesbank in favor of the franc.11 Yet the Bundesbank was not willing to buy francs without limits.

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 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 1948 to the end of the EMS.

The success of the Bundesbank’s resisting inflationary pressures, unfortunately, was a pyrrhic victory. The EMS had had important psychological effects. Europeans, including Germans, believed that there was a European “system” that had stabilized exchange rates somewhat. But it was an illusion. There had been no “system,” just independent central banks inflating at different rates and trying to stabilize their own rates to some degree. This illusion reduced the distrust of central European institutions. The public was now psychologically prepared for a European currency. Government propaganda presented it as the logical next step in a “European Monetary System.”

The single European currency was the final solution for European governments with inflationary desires: one could get rid of the brakes that the Bundesbank was putting on deficit financing of European states and enjoy a stable exchange rate at the same time. The solution meant the factual abolition of the spirit and power of the Bundesbank. 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.

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12 Jesús Huerta de Soto, Money, Bank Credit and Economic Cycles, 2nd ed. (Auburn, Ala.: Ludwig von Mises Institute, [2006] 2009), describes the history of monetary deposit contracts. He shows that these contracts already existed in ancient times and that the obligations of these contracts were violated by bankers. Bankers used the money given to them as deposits for their own affairs. The story of misappropriation of deposited money repeats itself later in the Renaissance.

13 Ludwig von Mises, Interventionism: An Economic Analysis (online edition: Ludwig von Mises Institute, 2004), http://mises.org.

14 As the most comprehensive treaty on business cycle theory see Huerta de Soto, Money, Bank Credit and Economic Cycles.

15 Germany continued to pay billions of dollars to keep American troops in the country as protection against potential Soviet invasion.

16 Between 1972 and 1973 there was, for a short time, a system called “the snake in the tunnel.” In this informal system currencies were allowed to fluctuate ±2.25 percent against each other. The tunnel was provided by the dollar. The Smithsonian agreements had set ±2.25 percent bands for currencies to move relative to the US dollar. When the dollar started to fluctuate freely in 1973, the tunnel disappeared. The snake left the tunnel and a Deutschmark-dominated block remained, with currencies fluctuating ± 2.25 percent. As the Bundesbank was no longer obliged to buy the excess supply of dollars, it could raise interest rates and restrict liquidity. While the French government wanted to influence the economy by credit expansion, the German institutions wanted to fight against inflation. France left the snake in 1974. It returned in 1975 in an attempt to reduce German hegemony, but was gone again one year later. In 1977, only Germany, Benelux and Denmark remained in a de facto Mark zone. For more on the history of the snake and the EMU, see Ivo Maes, J. Smets and J. Michielsen, “EMU from a Historical Perspective,” in Maes, Ivo, Economic Thought and the Making of European Monetary Union, Selected Essays by Ivo Maes (Cheltenham, UK: Edgar Elgar, 2004), pp. 131–191.

17 On the failings of the EMS see Murray Rothbard, “Schöne neue Zeichengeldwelt,” in Das Schein-Geld-System: Wie der Staat unser Geld zerstört, trans. Guido Hülsmann (Gräfelfing: Resch, 2000).

18 See David Marsh, Der Euro – Die geheime Geschichte der neuen Weltwährung, trans. Friedrich Griese (Hamburg: Murmann, 2009), p. 21. Maes, Smets, and Michielsen (“EMU from a Historical Perspective,” p. 171) write that French politicians understood, “that only a European pooling of national monetary policies could put an end to German dominance.”

19 See Marsh, Der Euro, pp. 135–136.

20 The best work describing the struggle of European governments wanting higher spending on one side and the Bundesbank trying to maintain inflation limited on the other side is Bernard Connolly’s The Rotten Heart of Europe. Connolly shows the dominance of the Bundesbank in many instances. The dominance of the Bundesbank is also illustrated by an anecdote recalled by Rüdiger Dornbusch, as told in Joachim Starbatty, “Anmerkungen zum Woher und Wohin der Europäischen Union,” Tübinger Diskussionsbeitrag no. 292 (2005), p. 13. At a dinner, the then President of the De Nederlandsche Bank, Wim Duisenberg, was passed a note. He passed it on to his vice president, who also read it. Both nodded and gave the note back. When Dornbusch asked what was written on the note, he was told that the Bundesbank had raised its rates 50 basis points. The nodding meant that they would follow and also raise 50 basis points.

21 Within the very first years—from spring of 1979 to the spring of 1983—there were seven readjustments alone. The readjustments implied an average appreciation of twenty-seven percent of the Deutschmark. In total, there were twenty two readjustments over the whole period of the EMS from 1979 to 1997.

22 Marsh, Der Euro, p. 241. In the early 1980s in a similar situation the French government had threatened to leave the EMS and impose import duties if the Bundesbank would not support the franc.

• 1Roughly a year before starting to purchase government bonds, the ECB started to buy covered bonds issued by German banks. The purchases were progressive and reached €60 billion.
• 2Cash-online, “Forsa: Deutsche überwiegend gegen den Euro-Rettungsschirm.” News from June 7, 2010, http://www.cash-online.de.
• 3Shortnews.de, “Umfrage: Mehr als die Hälfte der Deutschen wollen die DM zurück haben.” News from June 29, 2010, http://shortnews.de.
• 4GRReporter, “The Social Tourism of Bankrupt Greece,” July 12, 2010, http://www.grreporter.info. In the summer of 2010, many Greek entrepreneurs did not want to serve clients participating in the state programme. The Greek government pays its bills six months late, if at all.
• 5D. Hoeren and O. Santen, “Griechenland-Pleite: Warum zahlen wir ihre Luxus-Renten mit Milliarden-Hilfe?” bild-online.de, April 27, 2010, http://bild.de.
• 6The European Communities consisted of the European Coal and Steel Community, creating a common market for coal and steel; the European Economic Community (EEC), advancing economic integration; and the European Atomic Energy Community, creating a specialist market for nuclear power and distributing it through the Community. Yet, even at the very beginning of European integration we can already appreciate the “socialist intentions” of Jean Monnet, the French intellectual father of the European Community. Monnet planned the European Community to be a supra-national rather than an inter-governmental organization [Christopher Booker and Richard North, The Great Deception: Can the European Union Survive? (London: Continuum, 2005)]. For Monnet’s tendency toward central planning see also Tony Judt, Postwar: A History of Europe since 1945 (London: Vintage, 2010, p. 70). The French government feared a German revival after World War II. The EEC assured the French privileged access to German resources (Judt, Postwar, p. 117). The integration of Germany into Europe was thought to prevent a German revolt against the conditions imposed upon it after the war. As Judt, Postwar, p. 156, writes: “[The High Authority of the EEC] above all would take control of the Ruhr and other vital German resources out of purely German hands. It represented a European solution to a—the—French problem.” Despite these political intentions behind the EEC, elements of the classical liberal tradition remained strong in the beginning.
• 7The Council of the European Union, often referred to as the “Council” or “Council of Ministers,” is constituted by one minister of each member state and should not be confused with the European Council. The European Council is composed of the President of the “Council of Ministers,” the President of the Commission, and one representative per member state. The European Council gives direction to the EU by defining the policy agenda.
• 8These important birth defects reduce the credit given to the founding fathers such as Schuman, Adenauer and others.
• 9In 1959, for instance, the British government suggested a free trade zone for all of non-communist Europe. The proposal was rejected by Charles de Gaulle.
• 10Larsson, “National Policy in Disguise,” p. 162. As Larsson writes: “The arena, in which France sought to recreate its honor and international influence was that of Western Europe. As the leading country in the EEC, France regained influence to compensate for the loss of its empire, and within an area where France, traditionally and in different ways, had sought to dominate and influence.” As Judt, Postwar, p. 153 writes: “Unhappy and frustrated at being reduced to the least of the great powers, France had embarked upon a novel vocation as the initiator of a new Europe.” “For Charles de Gaulle, the lesson of the twentieth century was that France could only hope to recover its lost glories by investing in the European project and shaping it into the service of French goals.” (p. 292) Already in 1950 the French premier, René Pleven, proposed to create a European Army as part of a European Defence Community (under the leadership of France). Even though the plan ultimately failed, it provides evidence that from the very beginning, French politicians pushed for centralization and the empire vision of Europe. An exception is French President Charles de Gaulle, who opposed a supranational European state. During the “empty chair crisis” France abandoned its seat in the Council of Ministers for six months in June 1965 in protest against an attack on its sovereignty. The Commission had pushed for a centralization of power. Yet, de Gaulle was also trying to improve the French position and leadership in the negotiations over the Common Agricultural Policy. The Commission had proposed majority voting in this area. French farmers were the main beneficiaries of the subsidies while Germany was the main contributor. Majority voting could have deprived French farmers of their privileges. Only when de Gaulle’s agricultural funding demands were accepted the policy of the empty chair ended. Many Germans including Ludwig Erhard opposed the agricultural subsidies and favored a free trade zone. (See Judt, Postwar, p. 304). Adenauer, however, would never break with France. In exchange for subsidies for French farmers, German goods gained free entry into France. It was agricultural subsidies in exchange for free trade.
• 11Roland Vaubel, “The Political Economy of Centralization and the European Community,” Public Choice 81 (1–2 1994): pp. 151–190, explains the trend toward centralization in Europe with public choice arguments.
• 12In reaction to the crisis, the political class has tried desperately to save the socialist project of a common fiat currency for Europe. They have been successful—at least for the time being. After intense negotiations, an unprecedented €750 billion “rescue parachute” has been created to support European governments and banks. At the same time, however, the ECB has started what many had regarded as unthinkable before: the outright purchase of government bonds, an action which undermines its credibility and independence. The public and market perception of the monetary setup of the European Monetary Union (EMU) will never be the same.
• 13Resistance to these unprecedented measures is on the rise, especially in countries with traditionally conservative monetary and budget policies. A poll in Germany showed that fifty-six percent of Germans were against the bailout fund.
• 14It is not surprising that the majority of Germans want to return to the Deutschmark. They seem to understand intuitively that they are at the losing end of a complex system. They see that they are saving and tightening their belts on a regular basis while other countries’ governments embark on wild spending sprees. A prime illustration is the “Tourism for All” programme in Greece: the poor receive government funds toward vacations. Even amid the crisis, the Greek government continues the programme, albeit reducing the number of subsidized vacation nights to two. The Greek government also upholds a more generous public pension system than Germany does. Greek workers get a pension of up to eighty percent of their average wages. German workers get only forty-six percent, a number that will fall to forty-two percent in the future. While Greeks get fourteen pension payments per year, Germans receive twelve.
• 15It is not surprising that the majority of Germans want to return to the Deutschmark. They seem to understand intuitively that they are at the losing end of a complex system. They see that they are saving and tightening their belts on a regular basis while other countries’ governments embark on wild spending sprees. A prime illustration is the “Tourism for All” programme in Greece: the poor receive government funds toward vacations. Even amid the crisis, the Greek government continues the programme, albeit reducing the number of subsidized vacation nights to two. The Greek government also upholds a more generous public pension system than Germany does. Greek workers get a pension of up to eighty percent of their average wages. German workers get only forty-six percent, a number that will fall to forty-two percent in the future. While Greeks get fourteen pension payments per year, Germans receive twelve.
• 16It is not surprising that the majority of Germans want to return to the Deutschmark. They seem to understand intuitively that they are at the losing end of a complex system. They see that they are saving and tightening their belts on a regular basis while other countries’ governments embark on wild spending sprees. A prime illustration is the “Tourism for All” programme in Greece: the poor receive government funds toward vacations. Even amid the crisis, the Greek government continues the programme, albeit reducing the number of subsidized vacation nights to two. The Greek government also upholds a more generous public pension system than Germany does. Greek workers get a pension of up to eighty percent of their average wages. German workers get only forty-six percent, a number that will fall to forty-two percent in the future. While Greeks get fourteen pension payments per year, Germans receive twelve.
• 17The two visions have been struggling with each other since the 1950s. In the beginning, the design for the European Communities adhered more closely to the classical liberal vision. The European Community consisted of sovereign states and guaranteed the four basic liberties. From the point of view of the classical liberals, a main birth defect of the community was the subsidy and intervention in agricultural policy. Also, by construction, the only legislative initiative belongs to the European Commission. Once the Commission has made a proposal for legislation, the Council of the European Union alone, or together with the European Parliament, may approve the proposal. This setup contains the seed of centralization. Consequently, the institutional setup, from the very beginning, was designed to accommodate centralization and dictatorship over minority opinions, as unanimity is not required for all decisions and the areas were unanimity rule is required have been reduced over the years.
• 18The two visions have been struggling with each other since the 1950s. In the beginning, the design for the European Communities adhered more closely to the classical liberal vision. The European Community consisted of sovereign states and guaranteed the four basic liberties. From the point of view of the classical liberals, a main birth defect of the community was the subsidy and intervention in agricultural policy. Also, by construction, the only legislative initiative belongs to the European Commission. Once the Commission has made a proposal for legislation, the Council of the European Union alone, or together with the European Parliament, may approve the proposal. This setup contains the seed of centralization. Consequently, the institutional setup, from the very beginning, was designed to accommodate centralization and dictatorship over minority opinions, as unanimity is not required for all decisions and the areas were unanimity rule is required have been reduced over the years.
• 19The two visions have been struggling with each other since the 1950s. In the beginning, the design for the European Communities adhered more closely to the classical liberal vision. The European Community consisted of sovereign states and guaranteed the four basic liberties. From the point of view of the classical liberals, a main birth defect of the community was the subsidy and intervention in agricultural policy. Also, by construction, the only legislative initiative belongs to the European Commission. Once the Commission has made a proposal for legislation, the Council of the European Union alone, or together with the European Parliament, may approve the proposal. This setup contains the seed of centralization. Consequently, the institutional setup, from the very beginning, was designed to accommodate centralization and dictatorship over minority opinions, as unanimity is not required for all decisions and the areas were unanimity rule is required have been reduced over the years.
• 20The classical liberal model is defended traditionally by Christian democrats and states such as the Netherlands, Germany, and also Great Britain. But social democrats and socialists, usually led by the French government, defend the Empire version of Europe. In fact, in light of its rapid fall in 1940, the years of Nazi occupation, its failures in Indochina, and the loss of its African colonies, the French ruling class used the European Community to regain its influence and pride, and to compensate for the loss of its empire.
• 21The classical liberal model is defended traditionally by Christian democrats and states such as the Netherlands, Germany, and also Great Britain. But social democrats and socialists, usually led by the French government, defend the Empire version of Europe. In fact, in light of its rapid fall in 1940, the years of Nazi occupation, its failures in Indochina, and the loss of its African colonies, the French ruling class used the European Community to regain its influence and pride, and to compensate for the loss of its empire.
• 22Over the years there has been a slow tendency toward the socialist ideal—with increasing budgets for the EU and a new regional policy that effectively redistributes wealth across Europe. Countless regulations and harmonization have pushed in that direction as well.