In this new Prime Publication Ann Pettifor discusses why the Euro is “the gold standard writ large”. Read an extended version of this article on Social Europe.
The euro not only replicated key elements of the gold standard – but went much further: European currencies were simply abolished. States lost control over both their currency and their central bank. Parallels with the operation of the gold standard explain why, like the gold standard, the euro will fail.
The euro system denies monetary policy autonomy to states, and like the gold standard, insists on full capital mobility, over-values the shared currency, creates a sense of euphoria and excess when introduced into a new state; then applies deflationary pressures on indebted states, and like the gold standard encourages nationalisms, protectionism and political resistance: the very opposite of the liberalizing motives of its architects.
The gold standard is actually very different to the Euro. Under a gold standard, cash is produced through the minting of gold into coins. If the gold coins themselves are higher in value than their gold content, minting gold coins becomes profitable, and if the value of the gold in the coins exceeds the value of the coins themselves, melting gold coins becomes profitable.
On the other hand, Euros are created by the ECB, which introduces the new Euros into the economy by purchasing government bonds. In the Eurozone, each of the member states has an independent fiscal policy. This means that if a particular country has a large amount of debt, the ECB can monetize the debt of that particular country, whilst the burden of inflation is shared equally amongst the member states. This allows countries to massively increase their debt, which is why there is a debt crisis in the Eurozone, see http://www.alt-m.org/2015/07/02/alt-m-redux-incredible-commitments-euro-destroying-europe/ .
On the other hand, the gold standard was successful in countries that had free banking. Moreover, dollarisation has also been successful in countries that have tried it such as Ecuador. Preventing governments from having control over the money supply prevents debt crises, since lenders are cautious not to lend too much to a country that has the potential to default on its debt.