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Four Economic Myths That Perpetuate The Euro Crisis

Tyler Durden's picture




 

Submitted by Patrick Barron via The Mises Institute,

Too much of the commentary about the Greek crisis has focused on whether or not Greece should drop the euro and not enough on the structural problems arising out of decades of socialism. Meanwhile, the Greek government has borrowed more money than the Greek people can possibly repay, and debased money will not make this fact disappear. On the contrary, more easy money will cause even more harm.

The best thing that Europe and Greece can do for itself right now is to confront some of the economic fallacies that have long driven the debate over Greece, the euro, austerity, and debt. Here are four fallacies that are among the most damaging:

1. The Euro Is Too Strong a Currency for Greece

 

This statement usually is accompanied by a reference to Greek productivity being lower than that of the northern tier EU countries. The logic, such as it is, states that the euro is not a suitable currency for countries with vastly different levels of productivity. This is followed by a recommendation that Greece leave the European Monetary Union and reinstate the drachma. The National Bank of Greece then would set a very low exchange rate between the drachma and the euro, making Greek products more competitive.

 

Well, there is a semester’s worth of economic fallacies embedded in this chain of logic. A currency is an indirect medium of exchange. Two countries with different levels of productivity can use the same medium of exchange just as two individuals can. You may pay the kid next door to mow your lawn with dollars that you earned in a highly skilled and highly compensated profession. Yet you both use dollars. There is no reason that the Greeks and the Germans cannot use the same currency. In the age of the gold standard, national currencies were defined by their exchange rates to gold and were redeemable in specie; therefore, in effect, all countries were using the same currency — gold.

 

2. Debasing the Currency Will Help the Greeks Export Their Way to Recovery

 

Correlated to the above fallacy is the notion that debasing the currency will aid the Greek economy by the stimulative effects of an increase in exports. The idea is that the Greeks can give more drachma for the currency of its trading partners, making Greek exports cheaper in terms of the foreign currency. Increased exports will stimulate the entire economy. But currency debasement merely causes a transfer of wealth within the monopolized currency zone.

 

However, the Cantillon Effect tells us that the early receivers of the newly printed money benefit by their ability to purchase resources at existing prices. The losers are those furthest removed from the initial increase in spending, such as pensioners. They will find that their money doesn’t buy as much, due to price increases that are an inevitable consequence of an increase in money spending. Eventually, the exporters find that the cost of their resources has risen, at which point they demand another round of money debasement in order to prop up foreign sales and avoid business losses. They will be forced to pay more for their factors of production and must raise prices in local currency terms. In order to avoid losing sales they need their foreign buyers to receive more local currency so that their goods do not increase in price in foreign currency terms. This policy masks real structural problems. It is not a currency problem.

 

3. Instituting One's Own Currency Will Enable Government To Avoid Unpopular Spending Cuts

 

In other words, debasing the currency is a way to avoid the dreaded austerity monster. Governments would have the people believe that there are sufficient real resources to redistribute from the wealthy to alleviate all poverty. It is assumed that the wealthy have nefariously confiscated the people’s wealth, and redistributing it along socialist lines will result in plenty for all. The socialist “plenty for all” slogan has been around a long time and has yet to prove its worth in alleviating poverty.

 

4. A Currency Must Be Backed by a Political Power with Taxing Authority

 

Milton Friedman has been quoted as saying years ago, in reference to the formation of the European Monetary System, that a monetary union needed a fiscal union. Italy’s finance minister, Pier Carlo Padoan, was quoted in the Financial Times of London on July 27, 2015, as saying that the only way to defend the euro was to move “straight towards political union.”

 

Of course, both men refer to fiat money (i.e., money imposed by the state and backed by nothing except the legal tender laws of a monopolized currency zone). Real money — sound money — is a commodity that has been found by the market as the most useful intermediate means of exchange. Sound money arises out of the market process and is part and parcel of the market itself. Sound money is discovered by the market and is used willingly by cooperating parties. No one is forced to use sound money. Parties using sound money enjoy the protection of the rule of law. Counterfeiters are prosecuted. Bankers who fail to deliver specie upon presentment of money substitutes, such as money certificates, and bank drafts are prosecuted, too. The best monetary systems are private, because they must operate under the rule of law. The worst monetary systems are run by governments, because governments exempt themselves from the rule of law.

The Greeks (and Europe) Need Monetary Freedom

Dropping the euro will not solve Greece’s problems, nor would such a move remove the many structural problems underlying the European monetary union. An adherence to these economic fallacies has encouraged a belief that a few adjustments can fix the Greek-euro situation.

But, it is telling that in poll after poll, the Greeks themselves show that, although they do not desire austerity, they also do not wish to abandon the euro. They know that such a move will allow the government to destroy what little wealth remains in the country. The Greeks see the euro, with all its flaws, to be superior to a reinstated drachma. In fact, the best alternative for Greece right now is to allow free competition in currencies which would allow the Greek people to trade in whatever currencies they deem most desirable. At the same time, Greece should welcome and protect, via the rule of law, the establishment of private monies.

But the fundamental problem of the euro remains, and we must remember that the Greek government itself responded rationally to the structure of the European Union and the European Monetary Union. It borrowed heavily at low rates of interest from willing lenders. It accepted all the newly printed euros so eagerly offered by these flawed organizations’ various funds. It is not the only country to do so, merely the first in which the adverse consequences of the EU’s flawed structure became apparent. There will be others and the adverse consequences will be greater.

 

 

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Mon, 08/10/2015 - 13:45 | 6410762 ted41776
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sing it with me... EVERYTHING IS AWESOME

Mon, 08/10/2015 - 13:58 | 6410827 Dutti
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“But, it is telling that in poll after poll, the Greeks themselves show that, although they do not desire austerity, they also do not wish to abandon the euro.”

 

That’s democracy – I vote for having the cake and eat it too.

Mon, 08/10/2015 - 14:24 | 6410910 lasvegaspersona
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It seems the Greeks understand the 'cake' thing....yet they vote for those who promise cake even though they understand it has already been eaten. I guess it is wishful thinking though there was a hope that a big bluff might extend the eating of cake a bit longer.....bluff called.....commence austerity....

Reading about Greece in 2010 made me a lot less sympathetic towards the Greeks...13 and 14 month pay checks....retire at 55....no taxes....now that some of these have been corrected the pain has increased....hopefully there is relief down the road....

Socialism is a big lie paid for by others that always fails...except in getting liars elected.

Mon, 08/10/2015 - 14:40 | 6410954 FreeMoney
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The Greek people are fucked, and there will be more fucking before it is over.

Mon, 08/10/2015 - 14:55 | 6410998 TBT or not TBT
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Au  contraire, the Greeks did not get fucked enough, as you can see in their demographic distribution.  That lack of vigourous fucking stretching back many decades created their inability to honor long promised pensions etc at tax rates that will not strangle young and old alike.  

Mon, 08/10/2015 - 15:38 | 6411110 Semaphorum
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Socialism is a big lie paid for by others that always fails...except in getting liars elected.

So USA is the biggest Socialiste Country ever??, warff so stupid!

Mon, 08/10/2015 - 15:22 | 6411060 Retired Guy
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I haven't heard it suggested that Detroit's problem is the strong dollar and that all they need is their own currency to solve their problems. The idea is silly. Detroit is a mess because of bad government policies and corruption which if reversed might lead Detroit out of darkness.

I think the Greek people are right in believing that leaving the euro will not be an improvement for them.

Mon, 08/10/2015 - 13:48 | 6410783 nuubee
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An article about Greece? Oh man, this takes me back...

To last month.

Mon, 08/10/2015 - 13:49 | 6410785 KnuckleDragger-X
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The EU is still trying to figure out what's the worst thing they can do.......

Mon, 08/10/2015 - 14:57 | 6411004 TBT or not TBT
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They will settle on moar central planning, and you can take that to the bank.   The central bank.  

Mon, 08/10/2015 - 13:54 | 6410808 Latitude25
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Dear Greece,

 

Argentina has declared victory in their war with vulture hedge funds and they are moving ahead with socialist paradise.

Mon, 08/10/2015 - 15:13 | 6411036 John Wilmot
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^^Sarcasm, I hope?

Mon, 08/10/2015 - 13:57 | 6410817 NoDebt
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What's the preoccupation with "fixing" things?  What makes the author think it's broken or not working exactly as designed?  Ask Ghordius, he'll tell you you.

Mon, 08/10/2015 - 13:58 | 6410823 Batman11
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Which is worse Wall Street's Capitalism or Europe's socialism.

The Euro-zone was in great shape when Wall street crashed and burned in 2008.

Wall Street is the weakest link. 

Mon, 08/10/2015 - 14:01 | 6410830 Batman11
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Debt has been around for 5,000 years but bankers still don't understand their product.

“What is wrong with lending more money into the Chinese stock market?” Chinese banker before last month

“What is wrong with lending more money into real estate?” Chinese banker last year

"What is wrong with lending more money to Greece?" European banker pre-2010

"What is wrong with a NINA (no income no asset) mortgage?" US banker pre-2008

“What is wrong with lending more money into real estate?” US banker pre-2008

"What is wrong with lending more money into real estate?" Irish banker pre-2008

"What is wrong with lending more money into real estate?" Spanish banker pre-2008

"What is wrong with lending more money into real estate?" Japanese banker pre-1989

"What is wrong with lending more money into real estate?" UK banker pre-1989

“What is wrong with lending more money into the US stock market?” US banker pre-1929

Mon, 08/10/2015 - 14:11 | 6410880 juggalo1
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You didn't answer the question.

Mon, 08/10/2015 - 14:07 | 6410854 Batman11
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Unconditional bailouts and trillions in QE would have sorted Greece out too.

 

Mon, 08/10/2015 - 14:43 | 6410961 FreeMoney
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Oh thank god, were all sorted...no immenient market crash ahead.  time to buy!

Mon, 08/10/2015 - 14:05 | 6410852 shovelhead
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I hear Venezuela has made great strides in reaching the Socialist utopia in rooting out those filthy capitalists and their obsession for making profits from production.

Mon, 08/10/2015 - 15:14 | 6411044 John Wilmot
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Yes yes, much better to make losses from production!

Mon, 08/10/2015 - 14:07 | 6410860 juggalo1
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This article is missing the point.  Most of the players stating that Greece needs to exit the Euro, state they need to do it so they can get enough inflation to bring their debts in line with their GDP and ability to tax.  The productivityh and exchange rate issues reflect on their past problems.  They needed to have an independant currency so that the trade deficit and exchange rate would have reflected their lack of competitiveness.  Otherwise they had to do internal devaluation which is politically far more difficult.

Mon, 08/10/2015 - 15:15 | 6411046 John Wilmot
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You're repeating the very fallacies which the article demolishes.

Mon, 08/10/2015 - 16:51 | 6411365 juggalo1
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Where in the article did it list "ability to devalue or default on past debts" as a myth?  The article didn't say anything about redenominating or defaulting on past debts.  The four myths related to competitiveness, balance of trade, spending cuts and the structure of the Eurozone.  The point which you also missed is that once Greece goes out of the Eurozone they can hand their lenders toilet paper and declare the account squared.  Sure the other four issues remain, but the biggest one is gone.

Mon, 08/10/2015 - 17:47 | 6411613 gcjohns1971
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There was no need to demolish that myth.

The denomination of their debts was stated a the time those debts were issued.  Changing their currency does not change that denomination.

A 100 Euro Greek Bond does not become a 100 Drachma bond simply because the Greek Central bank changed its currency.  

The Greek government only owned those bonds before it sold them.  After sale the Greek government can change the bonds only thorugh default, regardless of what currency they use.  

And Greece doesn't want to default, because then no one will accept Greek currency for anything, and the Greek economy will further collapse.

Mon, 08/10/2015 - 14:10 | 6410875 kchrisc
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"Four Economic Myths That Perpetuate The Euro Crisis"

1) The banksters are not thieves.

2) The slithers, pols and crats, don't work for the banksters.

3) The banksters are not an instrument of Zion's plunder.

4) That all of it is not part of a plan.

Liberty is a demand. Tyranny is submission..

 

5) They give a shit about anyone but themselves.

Mon, 08/10/2015 - 14:41 | 6410957 Tursas
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This was the truth and not the dream of devaluation made by idiots described in the article! 

Mon, 08/10/2015 - 14:17 | 6410893 lasvegaspersona
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It is kind of interesting that the Greeks have observed that the actions of Greek governments is to debase the currency. They inderstand hyperinflation more than any academic can. They 'have been there'.

Mon, 08/10/2015 - 14:59 | 6411011 Hohum
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Borrowing too much money isn't unique to "socialism."  And, Mises Institute, get it through your thick skulls that debt isn't a bug in the system, it's a feature!

Mon, 08/10/2015 - 15:09 | 6411026 PoasterToaster
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Seems like some of these younger whippersnappers that have infested the Mises Institute have caught the right wing bug lately.  Almost seems like a takeover took place, and now its just another right wing talking point outlet.

Mon, 08/10/2015 - 15:06 | 6411021 PoasterToaster
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Sure, its "socialism" and not international bankers and the elitists they represent.  Obviously the answer is starvation and a good crack of the whip, eh boys?  Six of the best will straighten out those Greeks, what ho.

Mon, 08/10/2015 - 15:06 | 6411022 MagicMoney
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Greeks want to keep their income from government. That's why they have contradictory polls, they hate the euro, but love the euro at the same time. Why? Because they know drachma would be worse. They don't want austerity, yet don't don't want to dump the Euro. 

 

67% of Greeks get income from the government you can see why they vote in socialist or politicians that promise they will not remove thier incomes. They lived beyond their means. Greek leadership caved in because what real choice do they have? More precisely what is the best route? Greek leadership knows this, this is why they ignored the voters in the final bout of negotiations. Greece has a 170% debt to GDP. Greeks don't have much choice, because Drachma is not going to make things better, or fix it. Greek politicians created a bubble in government, the bubble burst.

Mon, 08/10/2015 - 15:08 | 6411023 PoasterToaster
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What alternative does anyone have when all economic activity has been made illegal outside of the cartel system?  There is little anyone can do to engage in trade when they face the barrel of a gun for doing so.

Mon, 08/10/2015 - 15:17 | 6411031 John Wilmot
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The article's spot on.

The Greek economy is simply not productive enough to sustain the standard of living to which Greeks have become accustomed (thanks to excessive borrowing from abroad). Redistributing wealth (as through inflation) masks the problem (at least for those Greeks lucky or politically connected enough to be on the receiving end of the largesse) while actually making it worse (i.e. further undermining productivity).

Mon, 08/10/2015 - 15:27 | 6411075 gregga777
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"The worst monetary systems are run by governments, because governments exempt themselves from the rule of law."

That is the key fact in the entire article. The government is the largest, oldest and most successful example of organized crime.

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