A nice speech by Mr Mojmír Hampl of the Czech National Bank, at the Mont Pelerin Society Annual Conference. Just wish it was a not longer.
What is the euro? As Barry Eichengreen demonstrated, it is a really unique animal, a unique monetary arrangement. I do not buy into many of Barry Eichengreen’s ideas, but I do agree with this particular statement. Why? Here is my definition of the euro. It is a “currency without a state”, in which a group of fiscally sovereign countries shares a single currency and a single central bank issuing fiat paper money, yet evidently lacks a clear monetary hegemon.
So the euro is not just a different version of the gold standard, as Balczerowicz, de Soto and many others argue. Not least because of the fact that unlike any commodity standard, the euro lacks anything resembling an ultimate numéraire.
And more importantly, within the eurozone Germany is not a monetary hegemon anymore. Yes, the German mark and the Bundesbank were clear monetary hegemons in Western Europe in the pre-euro era. And remember, it was argued that the euro would become “the German mark for the whole of Europe” in the many public debates that went on in Germany prior to its introduction.
Earlier it could frame rules now is just a player in framing them:
Yet it is evident that it could not and cannot function in this way. Yes, monetary unification in Europe does not make much sense without Germany. This is still true. But my definition of a clear hegemon is: it should have the right to set the rules and to force others to behave accordingly, the right to enforce the rules. And it has to have the right even to breach the rules itself and still not allow the others to breach the very same rules.
But this is not true for Germany after the introduction of the euro. To put it simply, eurozone membership turned Germany from a hegemon into just one important player in rule making and practical policy making. If I use a simple analogy from the world of motoring, in the German mark era Germany controlled the steering wheel, pedals and gearstick of the monetary vehicle, whereas in the euro era – and especially since the crisis broke out – it has had a firm foot only on the brake. And only sometimes, one must add.
Why is that? Well, in a euro-style monetary union, many important issues are put to a vote (or complicated negotiations), and votes and negotiations typically have different outcomes than dictates or decisions of a hegemon. If there had ever been a notion that the euro could be as depoliticised as the former mark, it simply had to fail. In reality it had to be more politicised by definition. The euro could not be a depoliticised German mark, because in many key decisions and respects it had to be a rather more politicised French franc, Italian lira or Spanish peseta. Otherwise, it seems to me, it could not have come into being in the existing set-up in the first place.
He says ECB is independent which is always a virtue. But has to stand upto 17 governments:
Why was Euro created? To prevent humiliating devaluations. However, it gave way to another kind of devaluation:
But if I understand monetary history correctly, the eurozone was created partly to make standard adjustments more complicated. The fear of constant “humiliating devaluations” was one of the reasons why some countries wanted so much to have a single currency with Germany and wanted a transfusion of credibility for their own economies. So the desire to free ride on the credibility of the former hegemon was a part of the very basic idea of some, monetary weaker, countries.
We are so happy to have got rid of humiliating devaluations, but we have not offered any better adjustment mechanism instead. When market forces appear on a different front – say, the bond market – many in the EU want to destroy or bypass these forces again and not to adjust the economies that have imbalances.
The funny thing is that many are happy that the supposed tragedy of devaluations is over, but what we are now requiring of the southern axis of the eurozone is a competitive devaluation. But in a harder-to-achieve form: a so-called internal devaluation. So we have got rid of the politically unpleasant adjustment mechanism and have very little instead
D-Mark was a public good. Euro is a common good:
Arguably, the German mark was – from a monetary point of view – a rather well administered pan-European public good. After the euro, this public good became overconsumed. Philipp Bagus, sitting today here in this room, argues that the euro is a classical example of a “tragedy of the commons” from the start, and that the smaller and weaker countries therefore inevitably ended up racing to make maximum use of the commons for their own benefit at the expense of the rest, thereby destroying this shared asset. The German mark can indeed be viewed as a sort of public good that became the subject of decisions made outside the public sphere in Germany and hence was fundamentally transformed.
Germans face a tough choice:
The average quality of the public good called monetary stability and good currency in the eurozone will very probably go down with the ultimate demise of the former European monetary hegemon. Let that be a warning to those countries which have not yet signed up to the monetary integration project. The fall of the former hegemon is relevant not only for the current crisis, but also for the future of the monetary order in Europe. And here I do not see any positive perspectives, I must bitterly admit. I am not saying that the euro has to collapse, but I am pretty sure that if it prevails, it will be a completely different currency implying completely different monetary conditions from what the Germans in particular hoped for. And Germany faces a tough choice – further integration or a perfect monetary order. This question is rather new and painful. The answer to it will influence all of us, I believe. So let’s wish them good luck
Very useful speech…Hope once again it was longer with more history and insights..