Monday, 29 September 2003

Swedish Sense

By saying “No” to the euro, whether for good or bad reasons, the Swedes have done a great favor for themselves and other Europeans. As Professor Jean-Jacques Rosa demonstrated in his book The European Error, the euro is economic nonsense whose main purpose is to give more power to the unaccountable top European bureaucrats. The euro is antithetical to economic efficiency, democracy and freedom.

A single currency for all European countries inevitably leads to a single European “super-state” — the supreme goal of the eurocrats. But the construction of one single continental state runs contrary to the flow of contemporary economics. For one quarter of a century, all big organizations, public or private, have fragmented and found efficiency in smaller scale.

Artificial socialist states like the USSR, Yugoslavia or Czechoslovakia have disintegrated. Why should we repeat the same error by trying to build a super-state with super-technocrats, super-social spending, not to mention super-taxes? The good Europe, the Europe of the Rome Treaty, the Europe of competition between companies and between states, already exists. Suppressing competition between states and currencies equates with bad Europe, the Europe of the Maastricht and Amsterdam Treaties.

Public servants and politicians naturally prefer to increase their power. Maximizing the pyramidal hierarchy allows them to minimize the control of citizens, taxpayers and consumers over the bureaucracy. But such control is absolutely necessary in a democracy. In any hierarchical organization, whether it is a commercial company or a state, the separation between controllers and decision makers is necessary for efficient management. If you want the best allocation of resources and the enrichment of the group, the last word should belong to the ones who pay, whether they are stockholders or taxpayers.

Swedes probably understood the democratic issue underlying the referendum on the euro. It was a good reflex from a small country fearing the control of major European countries, mostly France and Germany, who both have a natural tendency to consider Europe as an instrument of their power. The Swedes refused to subordinate their economic requirements to the European Central Bank, preferring to maintain their autonomy rather than participate in what they see as an increasingly dubious experiment.

The Swedes may have also noticed that their economic growth exceeds the average in the euro zone, that their public finances and their unemployment rates are better. Facts tell them to shun the euro. Classical liberal theories, which have certainly not been presented to them, demonstrate the same. Most economists are at least highly skeptical of the interest of the creation of euro.

Milton Friedman, a Nobel prizewinner in economics, considers the European currency to be a dangerous mirage because ‘the political conditions have not obtained.” For Martin Feldstein, a professor at Harvard, “Europe is not an optimal monetary zone”. He uses the four criteria of Robert Mundell that characterize an optimal monetary zone: 1) homogeneity of the countries; 2) flexibility of salaries and prices; 3) mobility of the people; and 4) existence of large common budgets allowing large transfers to the countries affected by external shocks.

Feldstein observes, as does Rosa, that none of these conditions exists. The first criterion of homogeneity is not present. Countries are very dissimilar. There are few links between the industrialization of Germany and that of Portugal. Since the signing of the Rome Treaty, European countries have had a natural tendency to specialize in the fields where they have a comparative advantage. This phenomenon illustrates the theorem of HOS (Heckscher-Ohlin-Samuelson). Contrary to popular belief, the economies of EU countries have evolved in opposite directions.

The second criterion — flexibility of salaries and prices — does not exist principally because of the various minimum wage laws that exist in every European country. Mobility of people, the third criterion, is very low. If one imagines a recession in Portugal and growth in Sweden, it would be extraordinary for many Portuguese workers to relocate to find a job in a country where they don’t speak the language. As to the last and fourth criterion, the budget, it remains largely in the hands of each nation. The European budget still represents a small part of all national budgets. And it will not change as no country is ready to contribute more for the benefit of others.

The euro zone fulfills none of the criteria of an optimal monetary zone. The best interest rates and exchange rates are not the same for all European countries. Those who thought that euro would put the EU in the same position as the US have been proven wrong. The advantages of the euro are as artificial as the monuments drawn on the banknotes. They do not exist. Most classical liberal economists, other than the ones already cited — Modigliani, Laffer, Dornbusch — have similar points of view. They all fear the negative consequences of the monetary union: excess centralization, decline of competition, and a decline in the development of the area.

“One market, one currency” is a motto invented by technocrats who want to control and block everything. Since the signature of the Maastricht Treaty, economic growth has been poor, and the rise of unemployment seems endless. European countries should abandon the euro and refuse the super-state. It would be democratic progress. The Swedes have shown the way. Tack för ditt “Nej” mina Svenska kusiner! (Thanks for your “No” my Swedish cousins)

Jean-Christophe Mounicq

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