Acton Commentary

Saving Europe's Money


Amidst the anti-inflationary policies presently pursued by most of the world's important central banks, the global economy continues to grow impressively. Even a number of Europe's lackluster economies are beginning to register respectable growth-rates.

One dark cloud, however, overshadows these positive developments. It comes from an unlikely source: France's new President Nicolas Sarkozy. In contemporary "Social Europe," Sarkozy is considered an economic liberalizer. He intends, for example, to liberalize France's hyper-regulated labor-market to reduce unemployment (especially among young people and Muslim migrants), improve flagging French productivity, and halt the exodus of French citizens seeking work abroad.

Sarkozy also wants to increase exemptions from France's notorious fortune-tax which has turned thousands of French citizens into tax-exiles, and to cap the total individual income-tax rate at 50 percent.

These are good first steps. Unfortunately there is another side to "Sarkonomics" which may have negative consequences for the entire European Union.

First, there is Sarkozy's recent successful effort to have the EU dilute its decades-old formal commitment to free competition was partly driven by his desire to shore up France's economic "champions of industry." This begs the question: if these companies are such "champions," why do they need protection from foreign competition?

Even more worrying is Sarkozy's expressed desire to significantly augment EU governments' control of the European Central Bank and exchange-rate and interest-rate policy.

Politicians of all complexions have plenty of incentives to want to exercise strong influence over central banks. Such control provides politicians with opportunities to manipulate currencies and interest-rates to maximize their re-election chances, regardless of the long-term fiscal consequences. It also gives politicians the option of letting the inflation-genie of the bottle to boost short-to-medium term employment at the expense of devaluing people's savings, shattering price-stability, and undermining long-term employment growth.

Governments' tendencies to succumb to such temptations are hardly-new. One of the most devastating critiques of such fiscal irresponsibility was written almost 400 years ago by a Spanish Catholic theologian, Juan de Mariana (1536-1624), in his famous Treatise on the Alteration of Money (1609).

An outspoken figure, Mariana's criticisms of the Spanish monarchy's monetary policies – specifically its habit of currency-manipulation – marked him as a dangerous man in the eyes of sixteenth- and seventeenth-century monarchs. Currency-depreciation was regularly pursued by most European monarchs to finance their wars and arbitrarily reduce their debts.

Mariana's opposition to such policies was moral and economic. His moral objection was that just as monarchs had "no right to tax his subjects without their consent," kings also "had no right to lower the weight or quality of the coinage without their acquiescence."

"If a prince," Mariana wrote, "is not empowered to levy taxes on unwilling subjects, and cannot set up monopolies for merchandise, he is not empowered to make fresh profit from debased money."

Mariana's primary economic arguments were that (1) the price-increases fuelled by monetary-debasement and the subsequent inflation hurt those on low and fixed-incomes; and (2) diminished confidence in the currency's relative stability and ability to accurately reflect the true value of goods and services undermined basic prerequisites of prosperous economies.

Such was the Spanish monarchy's fury at Mariana' criticisms, it imprisoned the aging priest for almost a year and confiscated his papers.

Recognizing the economic dysfunctionalism associated with excessive government control of money, many countries have legally mandated their central bank's independence. But what governments give, they can also take away. In February 2007, Venezuela's Hugo Chavez terminated the independence of Venezuela's central bank as part of his "new socialism" agenda.

Even when central banks' independence are legally mandated, plenty of central bank governors' memoirs detail the myriad ways in which governments seek to unduly influence their decisions.

Many recall the unseemly squabble surrounding the 1998 appointment of the European Central Bank's first president, the late Wim Duisenberg. So determined was France's Jacques Chirac to have a Frenchman at the helm, he forced through an "informal agreement" (publicly denied by all concerned parties) that Duisenberg would "voluntarily retire" 2 years before the end of his six-year term and be replaced by current ECB president Jean-Claude Trichet.

Sarkozy's desire to diminish the ECB's independence thus represents continuation of his predecessor's economic policies. But it also reflects the centuries-old unwillingness of many European politicians to leave Europe's currencies alone. Mariana highlighted this at the expense of his liberty.

In 1976, the Nobel Laureate economist Friedrich von Hayek argued that "denationalizing money" might be the only way to decisively limit governments' ability to manipulate money to further their own narrow ends rather than the common good.

Perhaps it's time for Hayek's and Mariana's fellow Europeans to start thinking the hitherto unthinkable.