Should the UK join the Euro?
Jan Skoyles looks at how the Euro might not be such a bad idea if it is the interim step to a return to the gold standard. Looking at a paper written by Jesus Huerta de Soto, she looks at the Austrian arguments for the UK joining the Euro, but concludes that the current path of central bank net gold investment and private citizens choosing to buy gold is more likely to be providing the first steps to the new gold standard.
Believe it or not, despite many problems happening over the channel, there are still plenty of people who think the UK should join the Euro.
Whilst leaders of the current major political parties in the UK see no prospect of the UK joining the Euro in their political lifetime, there are many in politics who still believe it is an inevitable scenario. Conservative peer Lord Heseltine said back in April that it was likely we would join the Euro in the foreseeable, as part of our need to go through ‘Europeanisation.’ On other side of the political spectrum Labour peer Lord Mandelson said a couple of months ago that the UK could join the Euro Mark II within ten years.
For those of us tearing our hair out, not knowing which way to look as the international economy appears to self-destruct, is this the UK joining the Euro just another example of politicians not learning what’s truly going wrong?
To the contrary, looking at it from an Austrian economics perspective the UK ascending/descending (depending your view) to the Euro, might be just the type of lesson and discipline politicians and policy makers in the UK need.
The proxy for the gold standard
Back in May Jesus Huerta de Soto argued for the Euro as a ‘proxy’ for the Gold Standard and for free-market economists to support it ‘while the only alternative is a return to monetary nationalism’.
It’s common knowledge that Austrian economists believe in a return to a sound monetary system in order to facilitate social and economic progress. A country joining a single currency union that is the Euro is just one of the many ways that we could gradually move onto the gold standard. The key to remember is that whilst the Euro currency is by no means an ideal one, it does hold significant advantages over the management of other currencies such as the US Dollar.
From an Austrian perspective, joining the Euro may provide the discipline and control governments must learn in preparation for returning the gold standard.
As Ludwig von Mises wrote:
The gold standard makes the determination of money’s purchasing power independent of the changing ambitions and doctrines of political parties and pressure groups. This is not a defect of the gold standard, it is its main excellence.
The arguments against the Euro are often the very same as those for the gold standard.
- Sovereign states unable to devalue their currency
- Control of interest rates from an outside authority
- No lender of the last resort
- ECB concerned with low inflation
- Difficulties of leaving
Are Euro countries in a better position than the UK?
At present it may appear as though countries which have maintained monetary autonomy are riding this crisis better than those who don’t. Those in Greece would argue that we Brits and Americans are in a far better position than themselves. At the moment we appear to be riding the financial storm better as we are able to inject liquidity into the economy and try, desperately, to weaken our currency. However, as history shows, this is merely a temporary measure and sets us up for a bigger fall.
In a brilliant paper, published May this year, economist Jesus Huerta De Soto outlines the three reforms needed to resolve the problems currently afflicting the financial system:
- The 100 per-cent reserve requirement must be re-established. This reinstates the ‘essential principle’ of what is yours, is yours in regard to bank deposits and equivalents.
- Central banks must be abolished. Their role as lender of the last-resort becomes invalid should 100 per cent reserve requirements be enforced. Legal tender laws would also be revoked and ‘government regulations that derive from them.’
- The return to the gold standard ‘as the only world monetary standard that would provide a money supply which public authorities could not manipulate and which could restrict and discipline the inflationary yearnings of the different economic agents’.
Huerta de Soto believes the above indicates the reforms which could be implemented in the interim before moving onto a gold standard. They would help ‘permit a more sound judgement about the different economic-policy alternatives in the real world.’ Within these reforms we can see some similarities with the Euro, hence why it could prove to be a suitable interim arrangement before moving onto the gold standard.
The major argument against the Euro, heard frequently nowadays in the UK, is the inability of countries to inject liquidity whenever a crisis occurs. In the Euro countries work within a fixed-exchange style system and countries are unable to inflate their way out of their crises. Instead, learning tough lessons through austerity measures and strict new controls. As each country joined the single currency they surrendered their power over monetary policy, the ‘monetary nationalism’ has been removed.
Central banks have been forced to show restraint during the Euro crisis, as they, really are no longer the central bank given the ECB has usurped power from national central banks. Providing an ideal ‘training environment’ for governments and countries who were otherwise used to central banks bailing the country out and devaluing their way out of crises.
Both Hayek and Mises argued ‘monetary nationalism’ and floating exchange rates are the nemesis of a healthy economy. One of the great criticisms of the Euro, and the EU for that matter, is it removes a country’s sovereignty. When it comes to monetary arrangements, this is a preferable situation. In a gold standard the need for national monetary policy is moot.
The gold standard works a fixed exchange rate and liquidity cannot be created from thin air therefore issues cannot be temporarily inflated away.
Those feeling the brunt of the crisis at present, Greece, Spain and Ireland (and no doubt Portugal, Italy and France to follow), have been unable to take on these irresponsible measures. According to Von Mises the inability to embark on such easy monetary policy is what is needed to provide a healthy, free-market economy.
Mises wrote “The only condition required is the abandonment of an easy money policy and of the endeavours to combat imports by devaluation.”
This is an extremely brief look at this idea, but is one which I hope to come back to in the future. In the meantime, look up Jesus Huerta de Soto and his analyses. They may not seem as crazy as they at first appear.
Personally, I doubt the transfer to the next monetary system will be so smooth as to go via another monetary regime. I suspect when we do see gold fully acknowledged as money it will be though the process we are seeing take place now – central bank gold hoarding and increasing private investment.
If there were ever the opportunity to join the Euro, I wonder if the British people would allow it, at present I suspect not. However, there are many things people ten years ago thought we would never see and look where we are now.
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