Sunday, August 07, 2005

Not quite like the gold standard

Johnny Munkhammar of the Swedish free market "think tank" Timbro have written a interesting op-ed column [In Swedish] in Sweden's fourth biggest newspaper, Svenska Dagbladet. In it he points out correctly that the root cause of the economic woes of the three biggest Euro-zone economies, Germany, France and Italy (as well as many of the smaller economies in Western Europe, both inside and outside the Euro-zone) are the so-called "social model". Yet the crisis is falsely blamed on free trade, EU enlargement and the euro. Munkhammar also points out that if for example Italy were to reintroduce the lira in order to devalue it and inflate even more, this would not solve Italy's problem and would make Europe poorer. So far so good.

In his article, Munkhammar also argues that the euro is equivalent with the gold standard in that they both take away the ability of national governments to temporarily hide the problems through inflating and devaluing. He does however express disappointment that this have not lead European politicians to institute free market reforms.

What Munkhammar overlooks is that the reason why the euro hasn't functioned as well as a gold standard would have is because of the fundamental difference between a fiat monetary union ( at least one whose policies are like current ECB policies) and a gold standard. Namely that the former means that a transnational central bank can inflate in a way which will enable the national governments to escape structural reform in a similar way to the conditions with national central banks.

And since the ECB have -contrary to the widespread but absurd myth of it being a inflation hawk- in fact been so inflationary ( See here ,here ,here and here),monetary conditions have been very loose in stagnating economis like Germany and Italy which means that these countries have at least as far as interest rates is concerned had a keynesian monetary policy, even though it hasn't been decided there. Meanwhile the imposition of this inflationary monetary policy has also lead to the creation of housing bubbles in fast growing countries like Ireland and Spain-and interestingly enough in slow-growing France and Italy too.

The idea of taking away the power of inflating at will from national governments is a good one for several reasons including that it could help pressure governments to do away with socialist economic policies. But for that to work, what replaces national monetary policy cannot act as if it were the keynesian monetary policies of weaker countries-which the ECB have in fact done but which a gold standard wouldn't have done.


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