euro-fireUnless you’ve been living in a bubble these past two years (and, arguably, many of Europe’s leaders have been) you’ll no doubt be aware that Europe is in a spot of bother at the moment. European Central Bank president Jean-Claude Trichet recently warned that a Eurozone default risks provoking a “Lehmans-style crisis”. This would be what financial types call a “major credit event” and could tip the world back into recession. When you pause to consider that the US is now just days away from a (thoroughly preventable) default, then the crisis takes on almost Biblical proportions.

Paul Nuttall, a Member of the European Parliament (MEP) with the UK Independence Party (UKIP), appeared recently on Russia Today arguing that the only option left was for the Euro to break apart and countries to devalue.

Nuttall argues:

The only way out of this mess is for those countries to back on their national currencies, to devalue, to get growth moving and to get exports going.

This worked for Iceland, or so the argument goes. However, there is a flaw to this plan. If everybody devalues… then nobody devalues. As Ryan Avent points out:

It should also be clear that devaluation works if you can ensure that you’re the only one that does it. Britain enjoyed benefits from leaving gold in part because it took others so long to follow suit. And while tiny Iceland can competitively devalue without generating responses from trading partners, Italy and Spain almost certainly could not. If everyone devalues, then no one gets a trade boost.

This is, of course, without mentioning the risk that Greece or others might leave the Euro only to find themselves facing both a bank run and growing debts still denominated in Euros, encouraging default as well as devaluation. None of the options available are particularly attractive.

Debating Europe has been having a conversation with @Pekkatron on Twitter recently, where he has been suggesting an even more radical alternative solution.

Pekkatron seems to be arguing that central banks (including, or perhaps only, the European Central Bank) should print money and give it away for free, rather than in the form of loans to private banks that then lend it to businesses and individuals. This seems like a recipe for inflation, whereby the more money is in circulation the less the relative value of that money. Could this be a solution to Europe’s woes?

All of these arguments sound perilously close to those being made in the 1930s about devaluing to competitiveness, exporting to growth, raising trade barriers and inflating away debts. Those arguments didn’t produce such good results. As always, the problem is that what might be beneficial for one economy is suddenly very damaging if ALL economies follow that path.

As Conor Slowey points out in his blog, the uncomfortable truth is that there are no easy quick-fix solutions. Every policy choice we could make faces obstacles, pitfalls and challenges.

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18 comments Post a commentcomment

  1. avatar
    hari naidu

    Absolute nonsense!

    How dare you make this an issue based on anglo-fear of Europe rising with its Euro?

    • avatar
      Debating Europe

      Hi Hari,

      I’m not sure I understand. The Euro is, I think I’m right in saying, in the middle of the biggest crisis it has ever faced. It’s not “Anglo-fear” of a rising Europe. There might be an element of schadenfreude, of course.

  2. avatar

    We must answer to a radical question :
    Who is the Euro property ?
    Only ECB can print and distribute EURO but the wrong news is : states has to pay for it.
    We wont pay ECB for the work , as a tipografy ! Because it produce piece of paper with some ink over it !
    We don’t want to pay the real value printed over the banknotes because is the people to produce that value.
    EURO belong to people not to ECB !
    Consider this : if we put ECB on a desert island , it can print all the EURO that wants , but this EURO has not any values because there is not people.
    People give values to the money in the exact moment that accept it for a transaction of goods !

    Central banks has not right to pretend te property of the money and europen peoplew are now enough stupid to let ECB to lent their own money.

  3. avatar

    For every produced goods we must create the right quantity of money to exchange it on the market
    States could control inflaction using a lot of statistical data as the same private bankers are doing now.
    When we have produced a car , we must create the right quantity of euro to buy the car.
    The way to control the inflaction is to stop to create money when the costs of goods on the markets became near the production costs of the goods.

  4. avatar

    So now , what are going to answer the Europe Leaders to the affirmation taht the property of EURO is not to the central Banks but belong to people ?

    • avatar

      They cannot answer , because this is the naked true.
      “Who is the euro property ? “is a question that make bankers shake their legs and shout euroleaders mouth closed.
      Soon this true will be knowed to the people !
      After we will see

    • avatar
      Debating Europe

      Hi Pekkatron,

      Central banks always lend money to private banks, though. They never just give them money for free. There would be a huge moral hazard involved in that action. How would you choose which banks received money for free? And why banks? Why not give money directly to citizens for free?

      The Bolsheviks experimented with things like this immediately after the Russian revolution – and it didn’t work.

    • avatar

      Your conclusion seems that print money and distribute free to the people will fall the humanity down in a communist society with the effect that everybody can immagine.

      Here we are not talking to remove the private property as sustained in the communism ! Instead we sustain the opposite ! THE PRIVATE PROPERTY OF THE MONEY.
      Person who has in the pocket some euro , must be the only owner of that euro.
      Instead now the property of the Euro is of the central bank. because of this all the money is debt due to the bank.
      This capitalism in this moment is more near to communism than the communism itself.
      People private property has been sucked away from the central banks ! Don’t you see that everyone as a debt ? Don’t you see that people is soffering very much this situation as was soffering in the communism dictatorship ?

    • avatar
      Debating Europe

      But the loans made to commercial banks aren’t arbitrary. They are lent at set interest rates (which is one way governments decide monetary policy) and with defined payment deadlines. Central banks cannot unilaterally change repayment dates or interest rates on loans. There would be legal, political and economic barriers to such behaviour.

      Also, what about fractional-reserve banking? Commercial banks also “create money” by lending out deposits to other customers. Would you suggest banning this practice as well?

  5. avatar

    Of Course the loans made to commercial banks aren’t arbitrary. They are lent at set interest rates (which is one way governments decide monetary policy) and with defined payment deadlines.

    As first step central banks print the money (from nothing) , the states print the certificate of debt (states promise to pay back the money in several years with interests)
    Second step : banks buy this state debt certificate using the money printed from nothing.
    It’s a simple exchanging of papers !
    But while states became full of debt , Banks became very rich.
    Simple end evil !

    Banks print from nothing and states (people) promise to pay back with their work the value that people itself has give to the paper printed from nothing from the bank.

    Is an intollerable unjustice with an usury rate over 200%

    • avatar
      Debating Europe

      States become heavily indebted because their expenditure is greater than their income, not because they print money. States that aren’t heavily in debt (such as China) also have to print money. Isn’t the problem, then, that certain states have simply borrowed too much?

  6. avatar

    No ! States became full of debt because they have to pay the banks for a currency instead that print this currency by themself !

  7. avatar
    Debating Europe

    In Britain, the banks owe three times more debt than the government. In Spain, government debt is modest, whilst non-banking sector corporate debt is more than 100% of GDP. In Canada, household debt is enormous. In many states the banks are more in debt than the governments.

    • avatar

      Everywere banks are using the money of their customer to create other money from nothing :
      Banks know that everyone never will let own account fall down to zero. People normally keep in own account a few.
      This few multiplied for hundred accounts is going to make a huge ammount of money.
      Banks can lend almost all this money eccept 7% fixed by law (it’s called fractional reserve).
      By fact Banks duplicate the money of unawere customers and using it to lend.
      Again Banks create values from nothing as you see.
      That’s why i laugh when i listen that Banks are full of debit.
      Debit doesn’t exist , is a creation of a powerfull and evil system called European Union or if you want call it Federal Reserve or Billdenberg Group

    • avatar
      Debating Europe

      Fractional reserve banking has been developed over hundreds of years – customers shouldn’t be “unaware” of its existence (it’s certainly not hidden from them).

      Bank debt is also very real – and banks can and do occasionally fail (like Northern Rock in the UK, or Lehman Brothers in the US). You may believe the current financial system to be “evil” – but what is the alternative? To provide money free to consumers will produce inflation, and to control the money supply and grow or shrink it based on inflation indicators as you propose creates, in essence, powerful centralised institutions with even more of the qualities you criticise the current system for having. In addition, if your goal is to wipe out debt then distributing money for free will not do that. Debt will naturally re-emerge as people borrow to invest.

    • avatar

      I haven’t been so clear ,let’s explain again :
      problem here is money printed from nothing and lend to people.
      It’s logic to ask : what kind of value has a paper with some ink over it ?
      Answer : no value ! it’s the people that is giving the value to the paper in the moment that is going to accept it.
      So : why the central banks are asking back the value of the paper if is the poeple that is giving this value by social convention ?

      Everyone can lend money eccept who emits.
      BCE is emitting EURO , they cannot emit and lend , but only emit !

    • avatar

      In essence, all forms of currency (even Gold) is “given” a value by who ever trades for it. If you want, you can even relate to Baseball cards or any other collectible. If there is demand (and for Gold there is) people “value” it higher. But what is gold, a metal. Why does it have value, because its rare and in limited supply. When it is “traded” it is then given a value. This value was not determined by a creator. This vale was not printed in the gold during creation. IT was determined during the trading process. Same thing with checks, a value is determined during the trading process. All forms of currency are only analogs for work willing to be done or already done or exchanges for other goods or services. It’s a barter system that allows goods/services to be traded at a later date then immediately. Instead of me trading you com0uter reapir for a cell phone right at this moment, I do a computer job and take cash (potential energy to spend so to speak)… When I find the phone I want (maybe at a later date) I trade my cash (potential “energy”) for the phone (turning it in to kinetic “energy”). The real issue comes from people who do not “put in” to the system but only take. When Governments take/borrow more then they take in to help people that do not/cannot put in to the system, the balance is out and the “energy” (money) is used up. This is not the place to discuss social policies of Governments, but printing money is not the issue, it is getting people to work for what they’ve got and expect to be handed everything as well as for the other side to NOT take more then they deserve and take advantage of the lower side.

  8. avatar
    Jorge Pestana

    I believe if the BCE, emitte 30 % of money , the Euro depreciates 30%, give them to people, the export grows 12% by year, to US and world.

    We could do a big diference, on world, please we can do a force, that Merkel could agree on this!!!!!

    One idea.


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