the tragedy of the euro-what about germany safecapital

7/30/2019 The Tragedy of the Euro-What About Germany SafeCapital

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The tragedy of the euroWhat about Germany?

Author: Brecht L. Arnaert, Chief Editor ofwww.SafeCapital.eu

Keywords: Free Markets, Economic Trends, Euro, Productivity, Fiat Money, Free Money, Austrian Economics, Debt

Crisis, Inflation, Currency Devaluation, Central Banks, Gold, Silver, Physical Gold, Central Banks Gold.

Content: This paper reflects Bracht L. Arnaerts belief in Europes economic and political situation and why this

crisis is much worse than our political leaders want us to believe so. The central thesis is that the traditional

(Keynesian) monetary and economic approach, based on the concept of easy money and central planning, has

reached its limits. By contrast, there is a growing need for a new set of principles, which can be found in the

"Austrian School of Economics.

The author is a student of Dr. Jesus Huerta de Soto in the Master program on Austrian Economics at Universidad

Rey Juan Carlos, Madrid. The views expressed in the paper are the sole responsibility of the author, as are any

mistakes in the misinterpretation of the work of Dr. Philipp Bagus, from whom the author largely draws. Dr.

Baguses book "The Tragedy of the Euro" is the main inspiration for this lecture, and a compulsory read for anyone

trying to understand this crisis

Source: The paper is based on a lecture by the author

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Get fresh new insights by subscribing to SafeCapitals newsletter on www.SafeCapital.eu

Our economy is not the only thing that is in crisis. Our economic theory is too, and even more so: for

decades macro-economic policy has been conducted within a Keynesian framework, and while no

Keynesian economist has predicted this crisis, or even is able to explain its causes, we are still listening

to them today to get out of the mess they brought us into. I would say that this is a problem of

legitimacy.

I am telling this not only as an economist. I am a defender of liberty too. What is happening in Europe

right now should not only worry economists, but every freedom-loving citizen. As we speak, measures

are being taken to take away our liberties in a way that Hayek described so well in his Road to

serfdom: each government intervention requires more government intervention, until no freedom is

left anymore. Step by step our property rights are being eroded, and, not too far from here, in Brussels,

a giant Moloch called the European Commission is centralizing powers with a speed that would have

been unimaginable before the Treaty of Lisbon.


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So, a lecture in two parts, one economic, and one political. Let us start with some theory about how

value is created, what the origins of money are, and how the euro is the right answer to the wrongquestion.

Economics

Economics is the study of value creation. It does not consider itself with the question what values men

should pursue, nor how value should be shared in a community. These are questions for respectively

moral and political scientists. Economists take the valuations of individuals as the given and goes from

there. A value is something one wants to gain or keep, and economics studies the means people use to

achieve these ends. About the desirability of those ends, it has nothing to say.

Mainstream economists largely ignore this definition of economics, and even turn it around. They regard

their valuations as the thing to be achieved, and the valuations of individuals as the means to it. Instead

of analyzing how individuals create value, they devise policies to make them conform to their one chief

value: stability. Macro-economic policy has only one purpose: an economy in equilibrium. The use of

government intervention is their way to push individual valuations towards this one pre-set value.

It is tempting to judge these policies form a moral angle, but that is why this lecture has two parts. As an

economist, the only question I have to answer is: What policy creates the most value? If it would turn

out that mainstream economics is right, then I have no story. But if it can be proven that macro-

economic policy actually destroys value, then the best macro-economic policy might be that we have

none. This is actually the thesis I will be defending tonight.

Euronomics

If I can prove the claim that macro-economic policy destroys value, then the discussion about monetary

policy is only a subset of this more general thesis. We will see that the euro is indeed a problem of

forced valuation, and more specifically the imposition of a centrally planned quantity of money onto the

public. It is the European Monetary System that determines what the quantity of money is, and

therefore, in part, its value. What the euro is worth does not arise bottom up out of the interaction

between individuals, but is decided top down by a few policy-makers, imposing their valuations on the

rest of society.

This cannot work, for reasons we will discuss in a minute. Apart from the problem of the impossibility of

central planning, the euro is confronted with yet another problem, of a more political nature. Without

judging the specific political reasons for setting up, not a European Central Bank, but a EuropeanMonetary System with now seventeen members, it can easily be observed that the euro is a system with

ill-defined property rights. While every member of the Eurozone can print its own money, nobody is

responsible for the purchasing power of the currency.

It is this essential feat of the political architecture behind the euro, which is mainly causing its problems:

if property rights are ill-defined, every body tries to externalize his costs. This is commonly known as

the tragedy of the commons, as described by Garett Hardin, back in 1968. Meadows that are owned

by nobody, but can be grazed by anybodys cows, will be exhausted in no time. Currencies that are

owned by nobody, but can be printed by anybody, face the same dynamics. The euro is a monetary

tragedy of the commons.


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Why central planning cannot work

Lets start with the proof that central planning cannot work. In his 1920 paper, called Economic

Calculation in the Socialist Commonwealth, Mises demonstrates why that is: under central planning,

there is no private property. If there is no private property, there is no exchange. If there is no exchange,

there are no prices. And if there are no prices, there is no way for a central planner to allocate resources

and labor, to know what needs to be produced, for whom, by whom and at what cost. By abolishing the

institution of private property, central planners abolish the one institution that could make their plans

work. Or in short: the only way central planning could work is by leaving the market free. It needs price

information, which can only be generated in a free market.

Most mainstream economists Keynesians, neo-classicals and monetarists alike to this day have not

understood Mises fundamental challenge: how are you going to centrally plan what is needed if the

information for that kind of planning can only be generated in a free market? How are you going to

decide how many shoes need to be produced if there are no ratios of offer and demand? How are you

going to decide whether the production of shoes is more urgent than the production of trousers, if there

is nothing to indicate a rise in importance? How are you going to decide who is to make the shoes or the

trousers, if you dont know who can make them? How are you going to decide what the cost of that

specific product should be, if you have no prices? The answer is: you cant. The information you need to

answer these questions can only be found in the price system, and it is exactly this system that has been

abolished.

It is startling to see how little economists really know about the workings of the price system.When Ibuy an apple, ceteris paribus, the price of all remaining apples raises. This price raise attracts

entrepreneurs who see a profit in lowering the price of apples again. They start producing apples. Clean,

simple. If I have to wait for a central planner to decide that an apple must be produced, I might as well

just eat carrots. By the time he has politically decided which orchard has to produce that apple, has

transmitted that order to Public Orchard nr. 56 and has replenished the stock of apples, I would already

have starved. There is no system faster than the price system to transmit a change in market conditions.

Mixed market model

Now, do we live in a centrally planned economy? No. But whatever is valid in principle is also valid in

degree. In a centrally planned economy the production of a citizen is expropriated entirely, and the state

spends 100% of his income. In our economy the production of a citizen is expropriated only in part, and

the state spends a bit more than 50 % of his income. But is there a difference in principle? Not at all. In

both cases, there is only a difference in the degree to which the economy is centrally planned.

Economists reducing the concept of central planning to the image of a Politburo full of high-hats

deciding how many cars have to be produced in the next five years, miss out on most of the debate.

The new central planning is much more subtle: the market is nominally left free private property still

exists but that what you can do with your property is regulated and taxed to such a great extent, that

free prices are practically impossible. Yes, the horse can run freely over the plains, but it has to eat this

grass, use that saddle, let itself comb with this particular brush and has to be in the stable at that hour.

Our prices arent free at all. How high or low they can go, is centrally decided. The margin by which they


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are allowed to fluctuate is still quite broad compared to full-blown communism, but that margin is

diminishing with every new measure the government takes.

Thus, the 1920 analysis of Mises, which indeed was originally intended as a critique of central planning,

is applicable to socially corrected market economies too. In our economy, property rights still exist, but

they are heavily burdened by taxes and regulations. Therefore, exchange rates are not what they should

be, and the natural price mechanism that normally coordinates supply and demand is disrupted, the

rate of disruption being the rate of central planning, which can be measured, in part, by the level of

taxes. But whatever the level of central planning is, the crucial insight is thatanydisruption of property

rights sends wrong price signals into the market, causing entrepreneurs to produce things there is no

real demand for.

The production of money

Now that it is proven that central planning cannot work, neither in principle, nor in degree, it is easy to

conclude that the euro cannot work either, since the euro is just another case of central planning, be it

in a monetary form. Most people have accepted the fact that shoes and trousers cannot be produced

through central planning, but though money is half of each transaction in the market, accepting the

same idea for the production of money, for most people, is a bridge to far.

Nevertheless, money is an economic good, just like all others. You cannot eat it, you cannot use it as a

part that fits in the construction of a car, nor can you mow the lawn with it. It seems to be dead matter

that has to be traded for something else, before you can actually put it to use. And this, precisely, is its

function: serving only as a medium of exchange, not wanted for its own purpose, but to trade goods for

goods. It has no other use than this. Money is hoarded because it can be traded against all other goods,and that is that. It is an economic good that has gained currency, very popular, but without trade, it is

useless. One can have a backpack with one million dollars, wandering trough the desert, but money

couldnt by you a drink if there is nobody to trade with. Money in itself is useless. It is a unique social

tool, that allows us to trade value for value.

But just because money is a social tool, a lot of people think that it is a social convention. That someday,

people decided that this or that would be money. This thought is not only wrong: it is the root of the

problems we are facing today. For how did money come about? By government decree? No, by millions

and millions of transactions in the free market. Before money arised from the market, there was only

barter. One individual had a bit of fish, and some other a lump of silex, and an exchange took place. Or

not. Because this is the biggest problem of barter: what if you really want that fish, but the guy does not

want your silex? What if he only wants to trade his fish for a handful of berries? The only way to solve

this problem is to look for a third trading partner that has a handful of berries. But that guy might not

want your lump of silex either, but some wood for the fire. A fourth person has to be found. In the end,

it is possible that a dozen of people has to be involved with one single simple transaction. And even

then, not all wants are satisfied.

The function of money

Money solves this problem. It is a good that is accepted for any other good. Out of all the possible

exchange materials (berries, fish, straw), free individuals selected that exchange product that would be

the most steadfast of quality, have the longest sustainability in time, the easiest divisibility, the rarest


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occurrence, and the most obvious recognisability. These five main characteristics are what give a regular

economic good a monetary premium. Now, if you apply these five characteristics to all materials youknow, which ones pop to your mind first? The answer is: gold and silver. Out of all the possible forms of

money, these two emerged as being the most wanted.

The rest is history. Taking gold on a business trip soon became too dangerous, and letters of exchange

were issued. These letters of exchange, first in person and payable for the exact amount, later on

evolved to standard notes of a certain quantity. Notes we now know as bank notes. Gold was kept in the

vault, and the notes issued against it were like the ticket you get from the cloakroom in the opera: if you

want your coat, you can always get it.

But imagine being a banker, storing all that gold, and seeing that nobody actually ever comes for it. The

banknotes circulate in the economy, and nobody bothers to come and pick up their gold anymore. If on

average only 10 % of the gold is ever picked up, then why not loan out the 90 % that is just sitting there

idle? New banknotes are issued, for the same reserves, and all goes well. Only 10 % of the people

comes to pick up their gold anyway. The banking business is truly a lucrative business. You namely did

not give out the new banknotes for free, of course not, you loaned them out against an interest rate. So

people pay you for using money you never owned in the first place. How good does it get?

Bank control in a free market

Pretty bad. With the evolving business of banking, bank notes only are a part of the money supply. Most

of the banknotes have been dematerialized into bank accounts. This digitalisation in itself is not wrong.

Whether one holds a property title in ones hand, or it is written in a book, or it is digitalized in a

computer, the principle does not vary: one is entitled to the weight in gold that is represented by theproperty title. The most important thing is that these property titles are not duplicated, because that is

where the problem really starts: if there are more property titles than there is property, each property

title becomes worth less. This is what we call inflation.

Inflation is what happens when somebody takes out a loan. Most people do not understand that the

money they lend in the bank does not exist before they sign their loan contract. Just as bankers in the

old days lent out money they didnt have, the same happens today. The only difference is that when a

banker commits this kind of fraud in a free market, he is evicted from the profession. The word

bankrupt comes from the Spanish banca rota which means broken bank. If competing bankers found

out that a banker had emitted more notes than he had gold in store, his little wooden exchange table

was broken. Banca rota, and the market was clean.

Nowadays the banking market is one of the most regulated markets in the history of mankind. If I want

to start a bank, I have to register with the central bank, which is not a public institution, but a private

company that has been granted a monopoly to produce banknotes at will. The central bank determines

the amount of reserves I must hold, in which products I can invest my money, what the tariffs are for

interbank lending, and so on. Banking is as free as a fish thrown in the desert. You can do whatever you

want, but you cannot swim, you cannot breathe, you cannot move. The central bank determines the

environment in which you work. And that environment is very hostile to free entrepreneurship.


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Moral hazard

Then where does the impression of recklessness of bankers come from? It seems like they can afford

anything. They can ruin peoples lives by taking foreclosures on loans with money that they never

owned, they can demand fierce reforms of public services without having to take any losses themselves.

They can even rule countries, as we have seen in the case of Greece. The answer is simple: moral

hazard. If you know, in advance, that you are going to be saved by the government, you will do as you

please. The truth is that the government has no option but to protect the bankers, because its own

survival depends on it.

To understand this, we have to get into the intricacies of banking. If we assume that the total money

supply is one hundred ounces of gold and only 10 % is ever picked up, then 90 ounces of gold can be

loaned out again in the form of previously non-existing bank notes, or the equivalent of these put in adeposit account. But those 90 banknotes, lets call them guilders, while being loaned out, are deposited

somewhere in the banking system too. However, the 10 % pick-up ratio does not change. Only 10 % of

these 90 guilders will ever be picked up. Then why not loan out 90 % of those 90 guilders? 81 guilders

are created, and end up somewhere in the banking system. And the beat goes on. 72,9 guilders are

created, and end up somewhere in the banking system. And the beat goes on. 65,6 guilders are created.

With a reserve ratio of 10 %, out of each guilder, one hundred guilders can be produced.

But what happens when more than 10 % of the people comes to claim their money? Then the banking

system faces a real problem, because to be able to pay out one guilder, a lot of investments that were

created on top of this monetary base have to be l iquidated. And if a loan fails to be paid back, the same

happens: on top of the money that was loaned out, a vast number of new loans depended. The only way

to pay out those people, or to replace old debt, is to create new debt, which is mingled in with the olddebt and the real money that was at the base of it.

The structure of production

However, there is a price to this. The monetary base on which all depends, the gold reserve, in

comparison shrinks with each emission of new money. What is backing the new money is not an

actual value, but a future value: the promise that the people that have taken the loan, will pay it back

after a certain amount of time. But the problem is: precisely by emitting more property titles than there

is property, the whole price system is distorted. Price valuations do not reflect the true value of things,

and the economic calculation problem grows. Less and less profits are made, and the loan is harder to

pay back. With each monetary injection, debt not only rises, but the structure of production needed torepay the debt, becomes less and less efficient. Prices dont measure value anymore.

For instance, due to monetary injections, the price of capital becomes far too cheap. In a free market,

the price of capital is determined by the amount of savings people hold. The more people save, the

greater the supply of capital, and the lower its price. In an unfree market, like ours, the price of capital is

determined by how many false property titles the central bank injects into the system, on top of which

the commercial banks can expand even more. Since it is very lucrative to loan out money that one does

not have, the price of capital drops far below free market levels.

This has an enormous effect on the economy. An effect you cannot even begin to imagine. Most

economists think that inflation is the worst problem when injecting money into the economy. Not in the


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least. Inflation is only the canary in the mineshaft of monetary policy. The true problem is that the

structure of production of the economy shifts towards capital intensive sectors, while labour intensivesectors get weeded out. While you can buy IPads and Humvees and beauty treatments and luxury

cruises and home cinemas and so on, you cannot find a plumber to do a little repair, a kid willing to help

out at the bakers shop, or a stump of a guy willing to help the brewer to deliver his beer. These labour-

intensive businesses can never compete with corporates for whom the most important cost is the cost

of capital. A cost that is being subsidized by central banking.

The effect is that there is a lot of highbrow consultancy, but no more service for the customer. A lot of

expensive HR-philosophies, but stressed out employees that need coaching. A lot of fancy cars, but no

social tissue that creates employment nearby, rendering these high-tech automobiles to luxury mobile

prisons: big companies centralize employment, causing more long distance commuting than would be

needed if the market was left free. The effects of centrally lowering the price of capital are so vast, but

yet so subtle, that most people never even realize that a lot of the daily problems they have is due to

the utter distortion of values, caused by central monetary planning.

Declining profits

There is yet another problem. Because the structure of production is forced, it produces a lot of things

people actually dont need. I see twelve year olds with an IPhone 5, eighteen year olds with a Mercedes

Benz and middle class people leaving on a holiday to the Seychelles like there was no tomorrow.

Meanwhile healthy food, good education, and qualitative medical care is starting to become

unaffordable for ever larger segments of the population. Again: it is not the task of an economist to

judge the ends people are looking to achieve. We must take it as a given. But knowing what we know

about central planning, and how it distorts the price system, it is clear that the true value of things ismisrepresented, causing less value, in stead of more. And that IS an economists business.

This story, however, will not last. Just because the structure of production is geared less and less to the

needs of the population, less and less profits will be made. One can only eat so many hamburgers,

before having health problems. One can only ruin the minds of young people for some time, before

companies find out they are graded idiots. One can only suppress symptoms of sickness with

pharmaceuticals for some time, before people go stark raving mad. Very soon, it will show that our

economy is not profitable at all, but has been consuming capital. Not by selling houses and living of the

rents, but by subtle force of inflation, devaluing just about anything: money, grades, relationships, and

even concepts.

That this system is bound to crash, is obvious. Because the structure of production is less and less

geared towards the market, the economy is less and less profitable, which makes the fiscal capacity

shrink. The biggest lender of all, namely, is government; the very reason one bank was given a license to

create a form of debt that everybody has to accept as a form payment is because the government

always wanted to be sure of its ability to loan: we make sure that your debt titles are legal tender, and

you make sure that we can lend whatever we want, which will enable us to buy votes. It is the perfect

match.


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The deadly shift

As the government propaganda to keep consuming, because that is good for the economy wanes,

people start to realize that their real needs lie elsewhere. When grandpa needs nearly unaffordable

medical attention, suddenly the new IPhone 5 is not seen a real life saver anymore. The whole

structure of production, geared towards the production of capital-intensive stuff, often even paid for by

consumer loans, shifts back to its normal free market proportions, liquidating those branches of the

economy that should not have existed in the first place. It is this event that we call a crisis: the macro-

economic illusions of policy makers are punctured by the micro-economic decisions of regular people

like you and I.

In a free market, shifts like this are no problem, because they are small. People who get fired, easily find

a new job, and there is far less debt, or even none. In an unfree market, like ours, these shifts are a hugeproblem, not only because the companies that go out of business during that shift are heavily indebted

and cannot repay their loans, which sets off a liquidation cascade of other bank investments that

depend on it, but also because this necessary shift has been postponed time and again by injecting new

money to boost demand. While vital laws of reality for instance that you cannot eat your cookie and

have it too have been denied for decades, reality now breaks through with the sum of its deferred

forces. Politicians say that markets dont work? They work like never before.

This shift is deadly to government finances. During that shift the economy temporarily produces fewer

profits, which means that less tax can be collected. But the interest payments do not wait. The only way

to fill the gap between revenues and expenditures is by borrowing even more, which means, in our

system, that even more money is injected into the market, creating ever bigger distortions of the

structure of production, resulting in even fewer profits, reducing the tax revenues even more, ignitingyet another round of borrowing. It really is a perpetuum culpabile, a never-ending amassment of debt.

The euro, finally

One might say this is a fairly long introduction to the actual subject of this talk, but how can one say

anything sensible on the euro if one does not know how money originated from the market, how its

production was collectivized by the government, what the real purpose of central banking is, what it

does to the structure of production, and why this monetary system is bound to fail? All this knowledge is

lost, and certainly in Flanders, Austrian Economics, the theoretical school I draw from for this lecture, is

not taught at any economics department at any university. At most, it is mentioned as a heterodox

theoretic side stream in economics, while it is as orthodox as economics get.

But now, let us use this knowledge to analyse the euro problem. We know that the euro is a centrally

planned currency, suffering from all the problems that arise with this form of economic governance. But

the euro faces even a greater economic problem, and that is the problem of the commons. In fact, the

euro does not exist. It is a name for all the currencies emitted by the central banks of 17 countries.

There are Greek euros, German euros, French euros, Dutch euros. Every euro has the same face

value, but the debt that is emitted to back the currency, is often of a wholly different quality. And what

is more: the more debt each state incurs, the more money it gets from the ECB. Debt is money, and

money is debt.


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If you would doubt this last sentence, then lets see in detail how the monetization of debt really works.

It is quite easy, actually. When a government needs money, it emits a bond. This bond is bought up bythe central bank. With what money? With no money at all. What the ECB does, is not printing money

as it is often said in colloquial speech, but printing paper scripts which it calls money, but in reality is

credit. Governments cannot make money, nor can central banks. Only entrepreneurs can. The bank

notes the ECB produces do not represent present value, but future value: the promise that the state,

which has given its debt obligation as collateral, will repay the full amount of the loan it took with the

ECB after some time.

If you have missed something here, it is not your fault: yes, the collateral for the loan the state takes

with the ECB is a debt obligation, and yes, the ECB pays the state with new debt obligations, which are

disguised as money, by painting them in all kinds of colours, and offering them in small denominations.

But, theoretically, there is no difference whatsoever between a government bond, and fiat paper

money. The fiat money that you have in your pockets tonight is not a property title, but a very liquid

debt title, with as collateral the promise that you will pay the underlying value of it back trough taxes. In

short: debt is money, and money is debt. If all debts in our economy would be repaid, there would no

longer be any fiat paper money.

The tragedy of the commons

So what happens when every national political elite can incur debt, but nobody has to incur the full cost

of a devalued currency? If France printed too much money in the old days, the French Franc lost value in

international exchange. If it prints too much money today, the loss of value is shared with 16 other

economies using that currency. In each and every one of those countries, imports will become dearer,

even though if they themselves would have maintained a healthy monetary policy. The euro is theswimming pool in which everybody urinates: everybody can externalize the cost of getting out of the

pool and going to the bathroom, and yet nobody is responsible for the water getting dirty. The price is

paid by all the other people using the water to swim in.

The only way to prevent the externalisation of costs is to inextricably link them to the profits that arise

from exploiting the same good. That is the function of property rights: if we would privatize the seas

today, they would be clean tomorrow. The only reason they are as filthy as they are, is because

everybody can externalize the cost of cleaning ones oil tanker by doing it at sea, which is nobodys

property, in stead of cleaning it in the harbour, where at least somebody has to be paid to process the

waste. Property rights are what tie costs to benefits. In a purely free market society, there is no way to

externalize costs. Socializing ones losses is only possible if there is a public good to socialize it to.

The euro is not any different. Using the commercial banking system as a proxy, there is an intermediate

step in the monetization of debt in comparison with the Federal Reserve System, but in essence, it is just

as much a case of externalizing costs as the example of the swimming pool: the cost of unsustainable

national policies is socialized into the public good which we call the euro, with nobody being there to

halt the loss of value of that currency. The result is an ever-accelerating devaluation of the purchasing

power of the currency, leading, in the end, to its final collapse. In the last century alone, approximately

one hundred fiat paper currencies have found their grave. That is one each year. Why would the euro be

any different? If it were not for the 15 % gold and gold receivables on the balance sheets of the ECB, the

euro would certainly end up in hyperinflation. But even concerning this gold reserve, as we have learned

from recent reports in the media, the situation does not seem to be quite clear.


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Conclusion

A lot more can be said about the euro, but this can suffice as a quick introduction. It is a fiat paper

currency, which means that it is backed by nothing more than the belief that some day, all the incurred

debt will be repaid. But, by virtue of the very architecture of this system, every repayment must happen

with new debt, which transforms debt payment into debt creation. It is true monetary perversion,

carried to its fullest extent.

But a correction is underway, and this I can state with metaphysical certainty. Regardless of what people

are made to believe, central planning violates the axiom of economics namely that values are

individual causing distortion in the structure of prices and therefore also in production. With each

company being rescued, each country being saved, a new emission of debt is being monetized,

distorting the price system even more, reducing profits even more, lowering the fiscal revenue evenmore, inducing governments to borrow even more. Whether people are lied to or not, believe it or not,

are ill-informed or not, this system has to crash, by metaphysical necessity. Scissors beats paper. Reality

beats propaganda. Vienna beats Cambridge.

Enter politics

So much for the economic part of my speech. Up until now, I have not said anything about the political

dynamics behind the euro. This is the province of my personal speculations, and should not be treated

as a scientific explanation. But, observing Europe, I think it is correct to say that there are two large

monetary traditions: that of Germany, with a quite strict monetary policy, and that of France, with a

monetary policy which is rather loose. Both policies are forms of central planning, and therefore to a

certain extent always flawed, although the degree to which they cause harm is different.

If you look at German monetary history, the importance of the 1923 hyperinflation cannot be

underestimated. It is this horrific experience that engendered the desire to have a stable currency, and

it is this desire that lay at the foundation of the predecessor of the Bundesbank, the Bank deutcher

Lnder, in 1948. Germanys central bankers inflated the currency too that is what central banks do

but at least they made sure that the German structure of production was not distorted in such a way

that the profits would fall short to repay the debt incurred. German central bankers have a tradition of

fending off politicians, who just love central banking, as it can print the money they need to buy votes.

French monetary history on the other hand is rife with examples of devaluing the currency, and

hyperinflation, not once, but throughout its history. Even today, a loose monetary policy is not seen as a

problem, and inflation is a quite normal method the French political elite uses to finance its socialist

policies without having to levy taxes. The French Central Bank, which is, again, a private institution with

a public charter, inflates the currency just as much as is needed to fund the policies of the political class.

Until the euro was installed, there hardly was any restriction, other than the exchange rates of the

currencies around it. And this is where the story of the euro comes in handy: as long as people can

compare the exchange rates with other nations, they can find out if their government has been printing

money. If there is one currency, nobody can see at face value if their government really is respecting the

monetary property rights of its citizens.


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Not an economic project

The euro, therefore, is the right answer to the wrong question. While in a free market, dollars, marks,

guilders and francs are just names for a weight in gold, in an unfree market, like ours, the value of these

currencies fluctuates amongst one another. While the official story is that the euro was needed to

stabilize these fluctuations, the real deal is that some countries could not stand the fact that Germany

was unwilling to print extra money as fast as they did. To give you an example: while Germany was being

occupied after WWII, in part by the French, the monetary policy of the German central bank was still

free, and by maintaining a policy of hard money, the French government was limited in its possibilities

to monetize the debt of its policies upon its population. The French claim that Germany forced them.

But what was forcing the French was not the Germans, but reality: you cannot print more property titles

than there is property, without incurring the cost of inflation. Revolting against this law, is revolting

against reality itself.

During the European Monetary system, the same dynamic can be observed. In 1972 the countries of the

European Economic Community agreed to maintain stable exchange rates by preventing exchange rate

fluctuations of more than 2.25%, the so-called snake in the tunnel. Although no currency was

designated as an anchor, the Deutsche Mark and German Bundesbank soon emerged as the centre of

the EMS. Because of its relative strength, and the low-inflation policies of the bank, all other currencies

were forced to follow its lead if they wanted to stay inside the system. Eventually, this situation led to

dissatisfaction in most countries, and in August 1993 the so-called Brussels Compromise allowed for a

broader fluctuation band of 15% (!!). Again, France was one of its main advocates. It wanted to force

Germany to print money as fast as they did. But Germany stuck to its guns.

The euro, in this regard, is much more a political project than it is an economic project. As stated before,there is absolutely no need for a common currency in a free market. Even if you would have three

thousand different currencies in the world, it doesnt matter. As long as each currency represents a fixed

weight in gold, and the exchange rates between them are fixed, it doesnt matter if I pay you in Arnaert

Guilders, or Krugman Francs, or Mises Dollars. The only difference between them would be a liquidity

premium, offset by maybe some discount for the decline in quality that comes with circulation. But large

fluctuations, due to easy money policies, are plainly impossible. Hence, the euro is not the answer to

the question on how to stabilize the exchange rates, but to the question on how to break the monetary

sovereignty of Germany.

Power and control

This thesis is not an accusation. It is a fact. The euro is the price Germany paid to France for its

reunification. Before the wall fell, back in 1989, France was the leading economic power in Europe. It

exploited the division of the two Germanys to maintain its fake leadership and to tighten its grip on the

European institutions. When suddenly the demand for reunification arose, France is confronted with the

fact that it will have to play second violin again. That was not to the likings of the French political elite.

The only means left open to maintain their power over Germany was by making them accept a common

currency. If enough countries could print their own euros, and Germany was to deliver the biggest part

of the fiscal capacity needed to repay the debt that backs it, the euro would turn into a device to suck

the lifeblood out of the German economy. For every euro of debt incurred, Germany would pay most of

all. That way, what is printed in Paris, is paid in Berlin.


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Of course, the story is not that easy. The way debt can be incurred is by voting for it in the ECB council,

in which all the countries of the Eurozone are represented. It is situated in Frankfurt, where theBundesbank is too. The Germans wanted it there, to keep a close watch on the European monetary

policy, and by supporting Wim Duisenberg, a Dutch hard money banker, it hoped to maintain its

traditional monetary policy. But democracy, in the end, comes down to two wolves and a sheep

deciding whats for dinner. France bought the votes of the other southern countries by promising them

European Regional Development Funds, and started to steer policies away from the German tradition,

towards the French political goal of loose monetary policy, and above all: the centralisation of powers in

the hands of a new European political class, dominated by the French.

In 2003, mid-term, Duisenberg resigned, and Jean-Claude Trichet, a student of the Ecole Nationale

dAdministration this is the school where France trains all its central bankers took over. Since then,

the German influence waned, and the democratic check on the speed with which the money supply

could expand, loosened. By 2008 the balance sheet of the ECB had doubled in size. And that was before

the crisis. So, to conclude, with the treaty of Maastricht, in 1992, Helmut Kohl signed away Germanys

monetary sovereignty. The gradual decline of that sovereignty is what we are witnessing now: Germany

makes a lot of noise, but in the end, they have to accept what France has in store.

Slave, not master

There are many illustrations of the servitude of Germany. After the first bailouts, a temporary

emergency fund was installed, with Germany reluctantly participating. This European Financial Stability

Facility quickly turned into a permanent emergency fund, in which Germany, nor any other country for

that matter, has any voice anymore. A technocratic elite is taking charge of things and since the

European institutions are manned in large part by Frances narques (that is the name given to thestudents of the Ecole Nationale dAdministration), saying European Union is like saying France. And

as a matter of fact, some high French dignitary expressed this Freudian slip, when he said that it was in

the importance ofFrance that the ESM should be installed, when he in fact should have said Europe.

The intention, meanwhile, is clear: to depict Germany as the bogeyman, while it is the country that has,

by virtue of its history, the best monetary mindset. In Greece, puppets of Merkel are being burned, and

in Spain, nazi-crosses are being carried trough the streets, as if the demands for some sanity in

economic and monetary affairs policy is something nazi-ist. Meanwhile France acts as if it wants to

protect the southern economies against this harsh German invader. The truth is, of course, that the

welfare state is just another Fabian name for organized class war between capital and labour, while the

only real war that has to be fought out is the one between tax producers and tax consumers.

The future?

For decades now, politicians have bought votes by promising higher unemployment benefits, longer

pregnancy leaves, and earlier retirement ages. They have passed the bill on to the next generation. My

generation. What is to come of us? The value destruction that is upon us will be of a magnitude big

enough to shake all the political institutions. Maybe for the good, maybe for the bad. What will happen

depends on us, the younger generation. Will we leave the virtual world of Warcraft and answer the real

Call of Duty? Will we be creative and cooperate with other people, or will we shootem up? Will we play

the Sims, or will we take up our real responsibility? If we dont rebuild Europe, then who else will?


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I see a continent in havoc, with people kept dumb. I see how populism is on the rise, not committed by

those who are accused of it, but by the accusers themselves. I see lies and propaganda. I see oureconomists, not knowing what the essence of value creation is: creativity and trade, and not coercion

and power. And above all: I see the old geopolitical cleavages widening again, and dont like it.

I hope that our generation, present in this room tonight, might find inspiration in the works of Ludwig

von Mises, Murray Rothbard, and Ayn Rand, to do what is right in the chaos that is upon us.

I thank you.

Brecht Arnaert.

the tragedy of the euro-what about germany safecapital

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