In our previous post, we wrote about how Mises envisioned the coming of the Euro, and how he thought it would result in exactly what we have today, poverty and international strife in Europe. He thought it would happen because of Cantillon effects, as explained last article, and in this one we will talk about what happened instead, and why.
Greece and Spain and Italy and other countries found a way to game the system that Mises did not consider worthy of discussion, I imagine, because it required tremendous recklessness and irresponsibility on their parts. Their method, which we’ll describe very soon, has the honor of bringing about the poverty and conflicts Mises predicted.
For right now, nobody was complaining about how to divvy up the spoils, because the Euro was young, and everyone wanted to start off on the right foot. But some countries found a way to have a lot of fun at other peoples expense now that their money was the Euro. Germany’s prestige as an economic powerhouse extended to the money it was using, the Euro, and thence to the economies of every other country using the Euro. Since Greek money and German money became the same thing, the Euro, the Greek govt found that it could borrow very cheaply, as cheap as Germany. So it did, and spent it all on wild cocaine parties [=not to increase production, but on sheer consumption]. Hey, why not?
Pretty soon they found out why not. Because nobody wanted to lend them any more, seeing as how it looked like the Greeks had no way to repay. Because of that, they were unable to borrow money to use to pay back what they already owed.
Now normally, if the Greeks were using their original currency, the drachma, nobody could care less. The Greeks have troubles? Too bad for them. Maybe they will learn to be responsible next time. But now that the Greeks were using the Euro, all Europe panicked. The powers that be feared that, just as Germany’s prestige had earlier extended to all countries using the Euro, now things may work in reverse. Greece’s lack of prestige and reputation of inept deadbeat might spread to all countries using the Euro. [And not without cause, either. Plenty of other countries where doing exactly what Greece was doing, too. I’m looking at you, France and Spain and Ireland and Italy.]. The result would be catastrophic. Interest rates for all govts in Europe would rise to over 100%, just like for Greece.
Now the best way to deal with such a problem is simply kick Greece out of the Euro and be done with it. Problem solved. But then the dream of “international money cooperation” [and we saw what that really means in the previous article] would die. So the rest of Europe decided that they would all kick in and pay Greece’s bills. Meaning Germany would, since it was the only country who wasn’t doing exactly what Greece was doing. German citizens did not like this idea at all, and we have our strife. And of course our poverty, since nobody was producing anything but the Germans, instead taking advantage of the Euro’s prestige to waste tons of money.
So that’s how the Euro nations shot themselves in the foot. They were more greedy and stupid than Mises wanted to bother talking about. You’ll remember he was assuming intelligent leadership running the Euro, and his point was that even in such circs the Euro would fall apart. It started falling apart much earlier because the leadership was incredibly foolish.
UPDATE 8/15/15: Gotta hand it to Philip Bagus. In a recent lecture, he showed that those wily Greeks were actually doing exactly what Mises predicted someone would do, and not, as I wrote here, doing something even worse. In other words, if you dig deep enough, what I wrote, though factually correct, is really a disguised version of what Mises said would happen. Listen to the enlightening podcast right here: https://mises.org/sites/default/files/19_MisesU_20150721_Bagus.mp3