The Tragedy of the Euro

CHARTER NINE The EMU as a Conflict-Aggregating System

“If goods don’t cross borders, armies will,” is an adage often attributed to Frédéric Bastiat and one of the pillar teachings of classical liberalism. When goods are prevented from crossing borders or from being exchanged voluntarily, conflicts arise. In contrast, free trade fosters peace.

In free trade, members of different nations cooperate with each other in harmony. In a voluntary exchange, both parties expect to benefit from it. Imagine that Germans are crazy for Feta cheese and Greeks long for German cars. When Germans buy Feta cheese from Greece and Greeks use their Feta revenues to buy German cars, the exchanges are mutually beneficial ex ante. In the age of division of labor, free trade is a prerequisite of any amicable arrangement between nations.

One possible conflict arises when goods are inhibited or completely forbidden to cross borders. If Germans can only buy Feta cheese at high prices due to tariffs or if the entrance of German cars into Greece is prohibited by law, the seeds for discontent and conflict are sown. If a country fears it will be unable to import essential foods or other commodities due to taxes or blockades, it may prepare for autarchy.

Protectionism and economic nationalism were the main causes of World War II.1 With the downfall of classical liberalism at the beginning of the twentieth century, free trade was under attack and protectionism was on the rise. Economic nationalism put Germany in a very dangerous position strategically, as she had to import food or commodities such as petroleum. The exposure of her position was shown when a British naval blockade caused the starvation of 100,000 Germans in World War I. After World War I, Adolf Hitler looked for Lebensraum and commodities in the east to make Germany self-sufficient in the age of economic nationalism.

Another impediment of free trade and the voluntary exchange of goods is the involuntary transfer of goods from one country to the other. A one-way flow of goods that is involuntary and coercive may sooner or later lead to conflicts between nations. In our example this would be the transfer of German cars to Greece without the corresponding cheese imports from Greece. While German cars flow into Greece, nothing real comes in return; no Feta cheese, no petroleum, no participation in companies, no Greek summer houses, and no vacations at Greek beaches.

A historical example of an involuntary one-way flow of goods is provided by the German reparations after World War I, when gold and goods were transferred to Allied countries under the threat of a gun. Germans at the time were outraged by this one-way transfer of goods. Hitler was elected on the promise of getting rid of the hated Treaty of Versailles and war reparations in particular. These reparations, seen as an additional violation of the voluntary exchange of goods, were factors leading to World War II.2

The founders of the European integration after World War II, Konrad Adenauer, Robert Schuman, Paul Henri Spaak, and Alcide de Gaspari, knew the importance of free trade for lasting peace.3 The horrors of war were very close to them. They wanted to create an environment in Europe that would put an end to the recurring wars and foster peace.

Their efforts have been a success; there has not been a war in Europe between member states of the European Union. In order to create this peaceful environment, the founders established a free trade zone fostering voluntary exchange. Mutually beneficial cooperation creates bonds, understanding, trust, dependency, and friendship. Yet, the construction was not perfect. While the Treaty of Rome established free movement of capital, labor and goods, unfortunately, the field was left open for the involuntary transfers of goods.

There are two main mechanisms by which wealth, i.e., goods, are redistributed between member states in one direction, thereby creating cracks into the harmonious cooperation of Europeans.

The first mechanism for one-way transfers of goods is the official redistribution system. The Rome Treaty already contained the goal of “regional development,” i.e., redistribution. Yet there was little action in this area until the 1970s. Today it is the second largest spending area of the EU. One third of its budget is dedicated to “harmonizing” wealth. The European Regional Development Fund (ERDF) was established in 1975. It spends money in the “structural funds” to finance regional development projects.

The other pillar of the direct EU redistribution policy is the idea of “cohesion funds,” instituted in 1993 to harmonize structures of countries and make their entrance into the EMU feasible. Cohesion funds are only open to countries with a GDP that is below ninety percent of the EU average. They are used to finance environmental projects or transportation networks. Their main beneficiaries have been Ireland and Southern European countries.4

The Dutch are the biggest net payers to the European Union, followed by the Danes and Germans.5 From 1995 to 2003, Germany paid net €76 billion into the coffers of the European Union.6 In 2009, the German government transferred €15 billion to the European Union.7 The redistribution of wealth among member states is a potential source of conflict: goods are effectively transferred without anything in return. Cars roll toward Greece with no cheese in return.

The second mechanism for the involuntary one-way flow of goods is the market for money. As discussed, there exists a monopolistic producer of base money, which is the European Central Bank. The ECB redistributes wealth by creating new money and distributing it unequally to the national governments on the basis of their deficits.

The national government spends more than it receives in taxes. To pay for the difference, i.e., the deficit, the national government prints government bonds. The bonds are sold to the banking system, which in turn takes the bonds to the ECB and pledge them as collateral for loans made through the creation of new money. In this way, national governments can practically print money. Their bonds are as good as money as long the ECB accepts them as collateral. As a consequence, the supply of Euros increases. The first receivers of the new money, the national governments running deficits, can still enjoy the old, lower prices. As the new money spreads to other countries, prices are bid up in the whole European Monetary Union (EMU). Later receivers of new money see their buying prices increase before incomes starts to increase.

To use a real world example: the Greek economy is not competitive at the exchange rate with which it entered the Eurozone. Wages would have to fall to make it competitive. But wages are rigid due to privileged labor unions. Greece has maintained this situation by running public deficits and printing government bonds to pay unproductive people high wage rates: its public servants and the unemployed. Those who receive government benefits may use this new money to buy ever more expensive German cars. The rest of Europe becomes poorer as car prices increase. There is one way transfer of cars from Germany to Greece. The means used to pay for the cars are produced in a coercive and involuntary way: the money monopoly.

When commenting on the Maastricht Treaty and the introduction of the Euro, the parallels to a reparation induced transfer of goods were noted in the French newspaper, Le Figaro, on September 18, 1992: “‘Germany will pay’ people said in the 1920s. Today she is paying: Maastricht is the Treaty of Versailles without war.”8

It was not only the Treaty of Versailles that created clashes. The monetary arrangement established by the Maastricht Treaty breeds conflicts as well, as we have already seen. The single currency institutionalizes conflict as the struggle for control of the money supply intensifies. As Greece’s structural problems remain unresolved and its government debt reaches extraordinary levels, Greece struggles to place new debts on the markets—even though the ECB still accepts Greek government bonds as collateral (even if they are rated as junk). The market has begun to doubt the willingness and capacity of the rest of the EMU to stabilize the Greek government.

The result is the bailout and transfer of funds from the EMU to Greece in the form of subsidized loans. The process of the bailout implying involuntary one-way transfers of goods has provoked contempt and hatred on government and civilian levels, especially between Germany and Greece.

German newspapers called Greeks “liars” when their government falsified statistics.9 One German tabloid asked why Germans retire at age sixty-seven, yet the government transfers funds to Greece so Greeks can retire at an earlier age.10 In turn, Greek newspapers continue to accuse Germany of atrocities during World War II and claim that reparations are still owed them.

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11 See Ludwig von Mises, Omnipotent Government: The Rise of the Total State and Total War (New Haven: Yale University Press, 1944), http://mises.org, eh. 3.

12 On the hunger blockade see Ralph Raico, “The Blockade and Attempted Starvation of Germany,” Mises.org daily article (May 7, 2010) [C. Paul Vincent, The Politics of Hunger: Allied Blockade of Germany, 1915–1919, (Athens, OH: Ohio University Press, 1985). This review was first published in the Review of Austrian Economics 3 no. 1.]

13 See Ginsberg, Demystifying the European Union, p. 387.

14 Ibid., pp. 257–260.

15 See Dutchnews.nl, “Dutch are Biggest EU Net Payers: PVV,” (January 14, 2010), http://www.dutchnews.nl.

16 Hannich, Die kommende Euro-Katastrophe, p. 30.

17 Bandulet, Die letzten Jahre des Euro, p. 107.

18 Quoted in Roland Baader, Die Euro-Katastrophe, p. 163.

19 See Alkman Granitsas and Paris Costas, “Greek and German Media Tangle over Crisis,” The Wall Street Journal (February 24, 2010), http://online.wsj.com.

20 See Hoeren and Santen, “Griechenland-Pleite.”

• 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.
• 11In 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.
• 12Resistance 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.
• 13It 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.
• 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.
• 16The 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.
• 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 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.
• 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.