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Thread: Europe’s Monetary Sins

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    Europe’s Monetary Sins

    Over at Public Discourse, a new article by Acton’s research director Samuel Gregg examines the deeper reasons behind the problems of the euro. In “Europe’s Monetary Sins”, Gregg points out that many of the euro’s present difficulties reflect a basic refusal of Europe’s political class to acknowledge some of the unpleasant economic realities associated with the EU’s social model, as well as a tendency to say one thing while really doing another. In short, Gregg argues that many of Europe’s economic predicaments flow from a crisis of truth, an unwillingness to recognize it, and the subsequent formulation of policy on the basis of untruths and half-truths. The most recent result of this process, Gregg says, is that the independence of the European Central Bank has been severely compromised:

    Ever since its foundation in 1998, the ECB has been a whipping boy for European politicians from the left and right who argue that the ECB’s legally mandated priority of maintaining price stability has kept productivity and economic growth rates in the EU far below those of America. In reality, these problems have little to do with monetary policy and everything to do with low rates of entrepreneurship, unsustainable levels of welfare expenditure, an aversion to competition, high rates of public sector employment, and structural rigidities associated with some of the world’s most inflexible labor markets. Indeed, it is probable that the ECB’s avoidance of the low interest-rate policies adopted by the Federal Reserve in the 2000s may have made the 2008 recession in Europe more bearable than it might otherwise have been.

    Against considerable political pressures, the ECB has hitherto doggedly defended its independence. All that, however, changed when the European Union decided to set up its 750-billion-euro bailout fund in early May 2010 to stabilize financial markets and rescue the holders of not only Greek government debt, but also, implicitly, the holders of any EU government debts that seemed shaky.
    https://blog.acton.org/archives/1661...tary-sins.html

    “Sin” is not a word normally associated with the ostensibly highly technical area of monetary policy. It was, however, the word employed by the prominent 20th-century French monetary economist Jacques Rueff (1896-1978) to explain why Western countries have had such difficulty maintaining stable currencies following the world’s abandonment of the gold standard after the outbreak of war in August 1914.

    In one of his last collections of essays, Le Péché Monétaire de l’Occident (1971), Rueff sharply criticized Western governments’ apparent inability to put their currencies in order. The root causes of the inaction, in Rueff’s view, did not lie in prudential disagreements about the technicalities of securing monetary stability. Instead the “sin” lay in the constant manipulation of monetary policy by politicians pursuing short-term and, in many instances, self-interested goals, while simultaneously claiming to be deeply concerned about monetary stability.

    Rueff knew what he was talking about. In 1958, Rueff engaged in a more or less singlehanded and ultimately successful struggle against the French political establishment to balance France’s budget and secure the franc’s convertibility. This followed the French economy’s near collapse after years of dirigiste policies and lost colonial wars in Vietnam and Algeria. Successful reform, Rueff stressed, involved being absolutely honest about the policy changes needed and their associated costs. Fortunately, Rueff was able to persuade the one man who mattered—France’s new head of government, General Charles de Gaulle—that the achievement of monetary stability was worth the pain of austerity in the form of dramatic social security cuts, drastic reductions in government subsidies to industry, and the dismantling of trade barriers.

    Contemporary Europe could well use far-sighted monetary economists such as Rueff when it comes to addressing some of its present economic problems. Sound monetary policy could not, Rueff understood, be premised on falsehoods. Yet this is precisely the sin presently wreaking such havoc in the euro system today.

    Since euro coins and banknotes entered circulation on January 1, 2002, many benefits have flowed from their adoption by many EU member states. The euro has helped them integrate their financial markets, facilitated price transparency across national boundaries, and reduced exchange-rate risks and the costs of currency conversions. The associated creation of the European Central Bank in 1998 with a clear mandate for fighting inflation has aided nations with long histories of monetary instability—such as Italy, Greece, Spain, and Portugal—in escaping the inflation spirals to which they were once susceptible.

    But from the euro’s very beginning, it was tarnished by a high degree of fudging of public finances by EU member states anxious to be admitted to the currency. Member states seeking admission were required to have a budget deficit level of less than 3 percent of GDP and a debt ratio of less than 60 percent of GDP. To meet this requirement, some governments employed what might be generously described as “creative accounting” or simply misrepresented their fiscal position. In 2004, Greece’s then-finance minister George Alogoskoufis confessed, “It has been proven that Greece’s budget deficit never fell below 3 percent since 1999.” In the end, most applicant countries were admitted to the euro despite having debt levels exceeding 60 percent. Italy and Belgium, for example, were permitted entry despite having debt ratios of over 120 percent.

    Over the long term, the European Stability and Growth Pact (SGP) was supposed to maintain fiscal responsibility in the euro zone by limiting government budget deficits to 3 percent of GDP and their debt to 60 percent. These provisions were, however, quickly violated by countries such as Italy and Portugal but also, ironically, by those nations (Germany and France) who had lobbied the hardest for rigid adherence to these thresholds. The European Commission continues to act as if violation of the SGP is a serious matter. But as Alberto Alesina and Francesco Giavazzi wrote in their book, The Future of Europe (2006), today “the large countries in Europe can do just about anything they please with deficits.”

    The effects of this mishmash of untruths, fiscal fudges, misrepresentations and the refusal of sovereign states to be bound by their freely undertaken international obligations are only likely to be magnified by Europe’s present financial and economic problems. This is especially true when it comes to the European Central Bank, its independence, and its role of maintaining the euro’s stability.

    Ever since its foundation in 1998, the ECB has been a whipping boy for European politicians from the left and right who argue that the ECB’s legally mandated priority of maintaining price stability has kept productivity and economic growth rates in the EU far below those of America. In reality, these problems have little to do with monetary policy and everything to do with low rates of entrepreneurship, unsustainable levels of welfare expenditure, an aversion to competition, high rates of public sector employment, and structural rigidities associated with some of the world’s most inflexible labor markets. Indeed, it is probable that the ECB’s avoidance of the low interest-rate policies adopted by the Federal Reserve in the 2000s may have made the 2008 recession in Europe more bearable than it might otherwise have been.

    Against considerable political pressures, the ECB has hitherto doggedly defended its independence. All that, however, changed when the European Union decided to set up its 750-billion-euro bailout fund in early May 2010 to stabilize financial markets and rescue not only the holders of Greek government debt, but also, implicitly, the holders of any EU government debts that seemed shaky.

    One of the more obvious difficulties associated with this package is that it further deepens the moral hazard problem that governments in Europe and America have at best paid lip service to over the past two years. In the long term, protecting governments from the consequences of their failed economic policies by socializing their losses is unlikely to deter the same governments from fiscal irresponsibility in the future. And while the rescue package might give some breathing space to countries such as Greece, it may also result in their governments putting off the harsher but essential elements of the austerity measures they need to take to reduce their sovereign debts.

    But the more serious and longer-term damage of the package has been to the independence of the European Central Bank. As the economist John Taylor astutely pointed out in a recent Financial Times article (May 11, 2010), part of the deal involves the ECB buying “the debt of the countries with troublesome debt burdens, just days after it said it would not engage in such purchases.” Clearly the ECB was pressured by EU governments to follow a line similar to that adopted by the Federal Reserve over the past two years.

    At present, the ECB is not engaging in “quantitative easing”—i.e., printing money—to fund these purchases. But it is difficult to imagine that the ECB will be able to continue to buy such debt over the long term without engaging in what some European government leaders now call “money creation” (yet another euphemism for printing money). That’s why the ECB’s decision to buy the government debt of some weaker economies amounts to a stunning volte face on the part of a central bank famed for its tough anti-inflation stance. The shock was such that it provoked a rare public criticism of the ECB’s decision by Germany’s central bank president, Axel Weber, in Börsen-Zeitung, a German financial newspaper.

    As a result of these decisions, the ECB now has a serious credibility problem. No doubt, the ECB and some European politicians will insist that it remains as independent as ever. This, however, is surely one of those instances of promoting a falsehood about the economy that Jacques Rueff warned against. For the truth is that the ECB’s independence has been compromised. Hence we have every reason to expect those European politicians who have argued for precisely such a diminution of the ECB’s autonomy to view this as a precedent for further compromises.

    Even more seriously, there is a question as to whether the ECB’s recent actions are compatible with its legally mandated priorities and responsibilities. No doubt the ECB will argue that its particular role in the implementation of the EU’s very own TARP for bankrupt governments is in the interests of long-term monetary stability.

    This, however, would constitute yet another misrepresentation. The more the ECB involves itself directly in supporting European governments’ fiscal policies, the less independent it will be in appearance and practice, and the less it will be able to resist exhortations to adjust monetary policy to fit goals dictated in part by the short-term horizons of elected officials. As the Economist (May 11, 2010) recently stated, “The central bank’s credibility relies in part on a reputation for living up to its pledges and partly on its disdain for political expediency. On both counts, then, [the ECB] has lost something.”

    Like politics, economic policy is a messy affair. This is especially true in mass democracies like those of Western Europe, in which permanent economic security is now regarded as a God-given right. Inevitably, there will be compromises. But this is all the more reason for those formulating EU monetary policy to resist being economical with the truth or claiming they are not doing something that everyone knows they are doing.

    In his most important book, L’Ordre Social (1945), one of Jacques Rueff’s last exhortations to his readers was: “Be liberal, be socialist, but do not be liars.” It’s advice that Europeans directing monetary policy would be wise to listen to today.
    https://www.thepublicdiscourse.com/2010/05/1332/

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    One thing that I think is very counter productive with modern economies is this idea that things have to keep on "growing" there is this need for constant "growth"and that tends to be at any price. I am not an expert but from my standpoint that seems to create a lot of problems for the West and our culture.
    I grew up on a belief of honour, courage and the old world values. The world isn't about that anymore, preferring to die a slow death of fast food and cheap thrills.

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    One thing that I think is very counter productive with modern economies is this idea that things have to keep on "growing" there is this need for constant "growth"and that tends to be at any price.
    Exactly! I've mentioned this myself on several occasions and I'm sure it all ties in with the usury system currently in place.

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    The basic sin is the single currency (and EU) itself.

    If you strip currency of a backing by real value (ie gold), currency is a reflection of a country's trade power, internally and externally. The EU consists of so many countries meanwhile with vastly different economic conditions that the mere attempt to sweep it all equal is the main cause of all problems of the Euro.

    And then, when we are at "truths", people must know that the Euro=DMark. The Euro was the "condition" under which Germany was allowed to reunify, and it cannot and will never work out to have a Greece or a Slovakia or whatever run on DMark. These countries will never cope with the strength of the German currency, even though we have been crippled beyond recognition meanwhile with and through the Euro. It also hurts them. All the economic "experts" told them they will profit from a strong currency, but they really dont. Portugal, Greece, the eastern countries and even Italy, all suffered enormously from the Euro, in addition to the policies (austerity) imposed on them to "meet the value of the currency", which they never will.

    The Euro itself is the crisis, and it is designed as such. It is designed to destroy Europe, and if it is not ditched soon, it will become the reason for the next Europe wide war which will make WWII look like a child's birthday party.

    I wished all the "experts" would finally examine the roots of the EU, what it is meant for (see video) instead of trying to fix the currency or economy, since they are merely tools to bring about the escalation that is supposed to eradicate Europe and its peoples.

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    The fiat monetary system, based almost entirely on debt, will inevitably collapse but it's enabled those who are running the scheme to buy off some lackeys to implement their genocidal plans.

    The 70 years or so it's been operating are more than enough to replace Europe's native populations, or at least sow the seeds for this.

    It's also noticeable that many of Europe's leaders today who have sold their nation's future for personal lucre do not have any children to suffer the consequences of their actions.

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    This passage explains everything and is very correct: "Ever since its foundation in 1998, the ECB has been a whipping boy for European politicians from the left and right who argue that the ECB’s legally mandated priority of maintaining price stability has kept productivity and economic growth rates in the EU far below those of America. In reality, these problems have little to do with monetary policy and everything to do with low rates of entrepreneurship, unsustainable levels of welfare expenditure, an aversion to competition, high rates of public sector employment, and structural rigidities associated with some of the world’s most inflexible labor markets. Indeed, it is probable that the ECB’s avoidance of the low interest-rate policies adopted by the Federal Reserve in the 2000s may have made the 2008 recession in Europe more bearable than it might otherwise have been."

    The US has a very unique and, so far, irreplaceable entrepreneurial culture outside their country. Another thing that exists there is the FED. I'm completely crazy about the FED and its importance on the world stage. The "Euro" (broadly speaking) is a pact so its stability and volatility depends on its covenants.

    The biggest problem with Europe isn't its monetary policy but to find its place nowadays. It's literally between the United States and Asia, the two poles of current development.

    However, I disagree with this passage: "The euro has helped them integrate their financial markets, facilitated price transparency across national boundaries, and reduced exchange-rate risks and the costs of currency conversions."

    Tell it to England, Switzerland... If I'm not mistaken, Germany only adopted it under pressure.

    Quote Originally Posted by Meister View Post
    One thing that I think is very counter productive with modern economies is this idea that things have to keep on "growing" there is this need for constant "growth"and that tends to be at any price. I am not an expert but from my standpoint that seems to create a lot of problems for the West and our culture.
    Do things have to keep "growing"? Yeah, that's what everybody wants. Not that I agree with it. Forcing it at any price is the worst way. The problem is that the whole world is extremely competitive and no one wants to be left behind.

    Is it counter-productive? It depends. If you have enough resources (not just capital) it's the best thing you can do, so much that several companies spend absurd amounts on R&D.

    But how do we do it without creating lots of trouble for our own contries and culture?

    I was in the hypothetical field. It depends on the country.

    Without being specific you create incentives for private equity to do this for you (mutual interest). And you invest massively in education, in the same style that South Korea did in the 1970s.

    With this you use a short-term plan to pay for a cultural change that will benefit the next generations.

    South Korea are the successful cases of this policy. Oh! China in certain points has the same policy but in the case of China nothing is what it seems to be... And China has several advantages like being the industrial park of the whole world, literally.

    Europe is fragmented as always.

    Will things get worse? In the short / medium term? Yes. It's a very uncertain time in terms of technology. For everyone.

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    Quote Originally Posted by Drusilla View Post
    The US has a very unique and, so far, irreplaceable entrepreneurial culture outside their country. Another thing that exists there is the FED. I'm completely crazy about the FED and its importance on the world stage. The "Euro" (broadly speaking) is a pact so its stability and volatility depends on its covenants.
    What about the FED are you crazy about? It seems like a great big scam to me.
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    Quote Originally Posted by Ţoreiđar View Post
    What about the FED are you crazy about? It seems like a great big scam to me.

    I meant that I'm interested in the role that the FED plays and in the people involved (both during its creation and the board members) and how it works (at least as far as I know and it's publicized). Not to mention that there's a lot of cutting-edge research being done there.

    And regardless of whether the FED is a scam or not, it's responsible for the monetary policy in the world's largest economy. So it has a huge world impact. Not only on monetary policy, but on control, on regulation, on security...

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    Quote Originally Posted by Drusilla View Post
    I meant that I'm interested in the role that the FED plays and in the people involved (both during its creation and the board members) and how it works (at least as far as I know and it's publicized). Not to mention that there's a lot of cutting-edge research being done there.

    And regardless of whether the FED is a scam or not, it's responsible for the monetary policy in the world's largest economy. So it has a huge world impact. Not only on monetary policy, but on control, on regulation, on security...
    Yes. It is a "scam" of monumental proportions. And the usurious, surreptitiously operating Jew banksters, and their goy lackeys, have control of the Federal Reserve; just as they have control of education, entertainment, and every other influential facet of our contaminated society.

    We are going to be completely controlled by these horrible creatures because at least 95% of the masses have been successfully mesmerized by them.
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    Quote Originally Posted by Gareth Lee Hunter View Post
    Yes. It is a "scam" of monumental proportions. And the usurious, surreptitiously operating Jew banksters, and their goy lackeys, have control of the Federal Reserve; just as they have control of education, entertainment, and every other influential facet of our contaminated society.

    We are going to be completely controlled by these horrible creatures because at least 95% of the masses have been successfully mesmerized by them.
    I can't disagree with that.

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