After The Fall: Saving Capitalism From Wall Street—and Washington

by Nicole Gelinas

Germany, France, and 14 other European nations have spent a decade ensconced in monetary union. But Europe might have been better off if its nations had continued to compete on currency. Nor would currency competition have forced Europe to sacrifice its goals for the twenty-first century.

The euro, which debuted in 1999, was the triumph of half a century’s worth of economic and political reconstruction. Its champions, chief among them postwar French and German leaders, hoped that the single currency would fuse the Continent in trade and travel. The euro would encourage greater investment in Europe because investors wouldn’t worry about currency risk. It would give weaker European nations something to aspire to—if they could cut their deficits, they could join the currency and attract more tourism and investment. Further, the euro would give stability to savers, who wouldn’t have to worry about their countries’ turning to inflation in a crisis and destroying the value of their savings. And the euro could compete with the dollar as a world currency.

These goals are admirable, but the common currency may do more to thwart than achieve them. Even cross-border travel, one of the euro’s big success stories, likely could have thrived without the common currency. Europe’s rail investments and deregulatory unleashing of competitive, low-budget airlines have probably done more for international travel than the euro has. Airport and railway-station ATMs put cash in travelers’ hands within minutes. People can use credit cards for almost any purchase now. It’s true that in a state of currency competition, European travelers would have needed to pay exchange fees on withdrawals and credit-card transactions; but competition would have brought banks and money brokers more customers—in addition to the people from England, America, and Asia who already use these services in Europe—and hence caused more jockeying on price, especially with European antitrust hawks watching. So, too, could trade and investment have surged with competing currencies—perhaps more productively than under the euro.

The biggest problem with the euro’s first decade, in fact, is that it did encourage cross-border investment—much of it unproductive. Banks and other investors lent too much, too cheaply, to Greek, Spanish, Italian, Irish, and Portuguese borrowers. Lenders figured correctly that France and Germany would never let a euro member default. Greece used borrowed funds to maintain an impossible system of labor and taxation, while in Spain and Ireland, the debt fueled property and financial-services bubbles, respectively.

Without the euro to protect them, each country would have had to compete for investor capital. Instead of proving to European bureaucrats that they could reform labor and control public spending, each national government would have had to convince investors—perhaps a more skeptical audience—that it would be fiscally responsible and encourage economic growth. Financial institutions, increasingly adept at helping investors hedge against currency risk, could have kept an eye on deficits, too.

As the crisis has unfolded, Europe’s attempts to hold its currency together could hurt the Continent’s competitiveness and discourage future investment. In May, to avoid a Greek debt default, Germany and France threw their support behind a $537 billion European Financial Stability Facility, which would lend money to weaker nations that had lost their ability to borrow in the capital markets. But the EFSF could delay a resolution by dangling these rescue packages. If Greece and Spain aren’t forced to face up to their problems, they will lose leverage over the labor unions, on which they could otherwise force concessions on work rules and retirement ages. Job markets will remain stagnant.

Further, German and French attempts to save weaker nations only prolong those nations’ problems while placing additional burdens on the strong. Investors in German and French debt must now consider not only those two nations’ growth prospects, but the probability that they will have to assume hundreds of billions of euros’ worth of their neighbors’ debt. Europe would pose a stronger counterweight to America if its individual nations didn’t have to deplete themselves so severely to prop up the currency.

As for inflation: sure, a pre-euro Greece would have repaid global creditors in cheaper drachmas—but sophisticated creditors would have considered that risk before lending so much to the nation in the first place; if they had calculated incorrectly, they would have lost money, as is expected in financial markets. Greece’s own mom-and-pop citizens, who save their money in bank accounts or bonds, induce more sympathy when it comes to the risk of losing their hard-earned savings to inflation. But if Greece or another nation were to fail to perform its sovereign duty to its citizens of safeguarding a currency’s value, citizens’ complaints should be with their own elected officials, just as is the case when a government fails at any critical national task. The solution isn’t found in outsourcing sovereignty to a more remote, less accountable, body. If, in an attempt to avoid a euro breakup, France and Germany agree to assume Greece’s unpayable promises, they’ve only transferred those promises—and the eventual inflation, too—to all Europeans.

The euro’s plight should serve as a reminder that in currencies, as in other markets, free competition strengthens nations by keeping them flexible and accountable. Rigid cooperation intensifies mistakes.

Nicole Gelinas, a City Journal contributing editor and the Searle Freedom Trust Fellow at the Manhattan Institute, is a Chartered Financial Analyst and the author of After the Fall: Saving Capitalism from Wall Street—and Washington.