Euro Crisis from Long Perspective

May 31, 2012

by Chidem Kurdas

The European crisis, in progress for years and still showing no sign of resolution, is largely the result of elite hubris. To create the euro and ram it down the throats of populations that, left to their druthers, would have stayed with their old currencies—this was a massive, top-down social engineering project.

There is no end to the harm done by the mindset that Hayek called constructivist rationalism—the delusion that smart aleck  bureaucrats and politicians can redesign societies from scratch like engineers constructing a machine from a blueprint. The lure of social engineering to government elites is such that even the dramatic collapse of communism has not been enough to drive home the Hayekian lesson of humility.

Creating the euro was a different level of ambition from building a common European market. The latter had historical roots. There had been free flow of goods, capital and people across parts of Europe in the 19th century and earlier. Political barriers and wars disrupted those flows, but at times and in places free trade and free migration across national borders was a reality. Indeed, by mid-20th century older people remembered with nostalgia how easy travel had once been.

Hence by removing the barriers to the movement of goods, money and people, the European Union was not imposing a novel blueprint.  Had it stopped with free markets, tremendous economic and political benefits would have been achieved with little downside. I have to admit that I never understood the aggressive drive to impose a common currency.

The United States is sometimes mentioned as a model. That’s misleading. The thirteen original American states were all colonies of the same empire, held broadly similar political views and used the same currencies. The Constitution was not dreamt up in a vacuum but was based on values and beliefs that went back centuries.

Hayek defined the proper function of government as  “to find justice, not to create it.” That is, governments should not invent rules out of whole cloth but recognize, codify and enforce the rules that have evolved over time, work well and are accepted by the population.

Thus the American colonists were inclined to constitutionalism long before they  turned to the making of a formal national constitution. In Massachusetts Bay Colony, concern that the magistrates might have too much discretion led to the proposed remedy “that some men should be appointed to frame a body of grounds of laws, in resemblance to a Magna Charta, which … should be received for fundamental laws.” That was in 1635.

The historian Daniel Boorstin, who gives the quote in The Americans: The Colonial Experience, pointed out that Americans modeled their political arrangements on ancient institutions familiar from the mother country. They knew that these protected liberties in England. Each colony drew a similar constitution. So the national constitution, when it came, had a familiar ring to it.

By contrast, ambitious politicians and Eurocrats invented the euro just like they invent endless rules that throttle local economies. We are witnessing the results.

Attempts to preserve the monetary union as constituted, for instance by flooding banks with liquidity, are becoming ever more costly and dangerous. Greece, Portugal, Spain, Italy—they can’t all be stabilized. Had the original currencies been in place, the market mechanism would have brought about adjustments.  In its absence, there will have to be triage, a decision who to bail out and for how long. Germany, the main source of funds, will probably be forced to pick and choose.

Amidst this painful process, what needs to be kept in mind is that free trade and markets matter much more than the euro. Preserving them should be the priority.

16 Responses to “Euro Crisis from Long Perspective”

  1. Roger McKinney Says:

    Seems to me the problem is less the Euro and more the end of socialism. The southern conference in the Big EZ ran out of money a long time ago and decided to borrow to keep socialism in place. The same crises would have happened under the old currencies had the southern Big EZ followed the same strategies. The only difference would have been that they borrowed Marks instead of Euros.

    The current crisis would end soon if the southern Big EZ would repeal rigid labor laws, unions would accept pay cuts, and governments would sell businesses, but they would rather starve.

    Imagine that the Big EZ had chosen gold as the common currency instead of creating the Euro. The crisis would have happened anyway. Socialism made it inevitable.

  2. stockerb Says:

    1. Hayek’s comments on constructive rationalism are trotted out regularly in relation to the European Union and have achieved the status of cliche rather than interesting use of Hayek’s thought.
    2. The post compares the political arrangements of the early United States with the economic arrangements of the European Union. A comparison of limited use.
    3. The United States constitution is commended as an example of Hayekian discovery procedure, but is itself an example of rational constructivism and intellectualism. Of course the colonists took things from English legal and political precedents, but the Constitution of the United States attempts to create a perfect republic on federal grounds which has no precedent in Britain. There is an evident element of fantasy in thinking that everything in the constitutional arrangements of the United States stems of Medieval England.
    4. The United States constitution was also formed by a political economy/public choice process to satisfy sectional demands. The understanding of this process are not assisted by references to rugged colonists and the legal traditions of Merrie England, which in large part evolved through the violent impositions and constructivist projects of Norman and Plantagenet monarchs.
    5. The US constitution which is commended was not able to prevent a devastating Civil War, the EU’s constitutional arrangements have yet to suffer such a blow.
    6. The US constitution did not prevent a series of extremely ugly Indian Wars, and the effective destruction of the customary laws and property of American Indians. The EU has yet to be party to such a horror.
    7. The problem with EU monetary union, with the Euro, is the lack of a fiscal union, not some failure to commune with the unwritten spirit of the law as it has evolved over history in the different European nations.
    8. United States debt is at a level which would cannot be sustained without a crash at some time. The federal state has kept growing under both Republican and Democratic Presidents. Civil liberties are being trampled by the Patriot Act. It is very strange that we are invited to look to the United States for some alternative to the EU in constitutional and economic matters.
    9. The EU will not be improved by a mixture of well worn passages of Hayek and idealising references to the United States, and its supposed continuity with monarchist feudal Medieval England.
    10. If these bits of Hayek are going to be trotted out, again, it would be instructive to at least have some consideration of how compatible his very traditionalist views about law are with his views about economic and social innovation.
    11. The politicians of European nations who created the European Union are no less part of tradition than the politicians who created the American Republic and its Constitution. The idea of the European Union, and its political basis in the Franco-German relationship has evident roots in the 9th Century Carolingian Empire, and even earlier in the Frankish monarchy.
    12. The nature of EU federalism is clearly shaped by German experience in the federal republic, which itself draws on Weimar federalism, which evolved out of the federal aspects of Bismarckian Germany, itself developing of of the proto-federal nature of the Holy Roman Empire of the German Nation,a nature which it had acquire by early modern times. We can also see precedents in the unification of Italy (Mazzini was an enthusiast for European Federation) and the federal nature of the Netherlands going back to the formation of the Dutch Republic, itself an important precedent for the American Republic.
    13. The EU also draws on the precedent of the Concert of Nations that emerged from the Congress of Vienna and which led to intervention in national affairs by the major powers claiming to act on behalf of Europe. It can also look back to the transnational legal and political role of the Medieval Catholic Church, a legacy of the the Roman Empire which itself provides an important precedent for ideas of pan-European law and sovereignty.

  3. Mario Rizzo Says:

    I am now in France and the news media are alarmed at what may happen to the euro. Very few people in the media seem to be focusing on the long run.I think Europe must choose its economic mess. Either one now as the euro zone breaks up or a continual race to the bottom as the freer spending states drag everyone else along or the political disaster of Germany trying to restrict other nations’ spending. Problem is they may get all three as Europe refuses to face reality.

  4. N. Joseph Potts Says:

    While fundamentally correct, this article is incorrect in styling the common currency as an unprecedented novelty in Europe. Back in those same days when TRAVEL was easier (noted in the post), MONEY was at least easier, and might for practical purposes be called a common currency. It was, of course, gold, according to which currencies were readily and predictably exchanged against each other.

    The chief error of the euro is the same as now applies to the dollar, the pound, and every other currency I know of: it is a fiat currency, imposed by a government(s). If, instead of banding together to create a new government-imposed currency, all the governments of the euro zone had simply given up the monetary monopolies each then held in their respective countries, one (or more) common currencies would have arisen on their own. And Hayek said THAT, too, at least in effect.

  5. chidemkurdas Says:

    Joseph Potts–
    Re “fiat currency, imposed by a government(s)”
    I understand you argument but a single fiat currency disables a market mechanism — fluctuations in exchange rates that would have occurred with separate currencies. You are criticizing all fiat currencies but it is the imposition of the euro on distinct economies that blocked the exchange rate adjustments that otherwise would be operating.

  6. chidemkurdas Says:

    Roger McKinney–
    I don’t disagree with your fundamental diagnosis. But still the common currency has made the problems worse and spread the damage.

  7. chidemkurdas Says:

    Mario Rizzo–
    Re “Europe must choose its economic mess.”
    That seems to be the stage they’re at. It is to be hoped that people will become better aware of the need to face unpleasant tradeoffs.


  8. [...] One thing I’ve been thinking about posting on, but couldn’t formulate something for, is the historical and value basis of the European Union from a liberal (particularly classical liberal/libertarian) perspective.  A post on another site that annoyed me, has helped me to formulate something; sometimes an antagonist, a negative stimulus of some kind is just what is needed.  So thanks to Chidem Kurdas for his post ‘Euro Crisis from Long Perspective’ at Think Ma…. [...]

  9. Allan Walstad Says:

    Ironic, isn’t it? There was effectively a common currency: gold. Now people are worrying about losing a common currency: paper. Again, please…what was so bad about gold?

  10. Lord Keynes Says:

    In fact, the Eurozone was designed by neoclassical economists, using flawed and false neoclassical theory. The neoclassicals who designed it were just as passionate worshippers of the free market as any Austrian. In fact, some Austrians were cheering not so long ago that the Eurozone budget deficit rules would reduce what they call fiscal “profligacy”

    That the Eurozone project is now collapsing demonstrates that you can’t have monetary union without effective fiscal policy.

    Despite what Roger McKinney says above, the return to domestic sovereign currencies and floating exchange rates, if and when it comes, will allow a return to more activist national fiscal and monetary policies.

  11. ccz Says:

    And in the USA everything is OK? Whose is worst shape?

  12. Lord Keynes Says:

    E.g., for Austrians giving qualified support to the Eurozone, see Jesús Huerta de Soto here, where he defends the Eurozone as a “proxy” for the gold standard:

    http://www.cobdencentre.org/2012/05/in-defence-of-the-euro-an-austrian-perspective/

    It is your belief that Jesús Huerta de Soto wanted to “create the euro and ram it down the throats of populations that, left to their druthers, would have stayed with their old currencies— [as] … a massive, top-down social engineering project”?

  13. Kendrick Says:

    Hmm is anyone else encountering problems with the
    images on this blog loading? I’m trying to find out if its a problem on my end
    or if it’s the blog. Any suggestions would be greatly appreciated.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Follow

Get every new post delivered to your Inbox.

Join 1,729 other followers

%d bloggers like this: