“All Initial Fears about the Euro Have Come True” – Interview with Jörg Guido Hülsmann

In an interview with the Austrian Institute, economist Jörg Guido Hülsmann bemoans that that key problems were not seriously discussed when the euro was launched. This carelessness has taken its toll in the wake of the 2008 financial crisis. But Hülsmann’s criticism of the current monetary order goes even further: unlike other economists, he does not shy away from questioning the state’s monopoly on money or the prevailing inflationary regime. He explains to the Austrian Institute why an overhaul of the monetary order is difficult but desirable in the long term. Finally, the Mises expert also discusses the importance of the Austrian School of Economics.

Austrian Institute: “Ten years of the euro, ten years of success” was the headline in all the German media in 2010. Since then, there has been more reticence. What is your verdict after 18 years of the euro?

Jörg Guido Hülsmann: That all the fears expressed before the launch of the euro have come true: The euro has become a bone of contention that divides Europeans. Even non-economists like Arnulf Baring expressed this concern in the 1990s. In 1918, Ludwig von Mises put forward similar ideas regarding the monetary union between the German Reich and German Austria, which was proposed at the time but never implemented. In such a union, there must be agreement on the extent to which the money supply is expanded, and on how much of the additional money units each nation obtains. These questions were never seriously discussed when the euro was introduced. It was thought that market criteria would suffice. Everything would develop automatically. New money would be produced according to demand, and the new money units would go to the highest bidder. This was not the case, as we saw after the financial crisis. Greece was bailed out in violation of all the rules. A new monetary-policy objective was announced, even though it had never been laid down in any European treaty, namely, the cohesion of the Eurozone. This has been interpreted in such a way to mean that we must keep everyone on board, even if we systematically subsidize some countries at the expense of others by printing money.

Before the introduction of the euro, on the other hand, the international division of labor and international trade within Europe were not so pronounced. Could a common currency help in this regard?

We have benefited from many positive developments. Greater economic integration, free trade in goods, and the free movement of capital have certainly helped. I am already more skeptical about the free movement of persons, and I have always been skeptical about monetary union. The gravity of the Baring and Mises argument has only gradually become clear to me. My objection in the 1990s was: the single currency makes it easier to incur debts and does not discipline anyone. That is why I expected even more debt and that the economy everywhere—not only in traditionally weak-currency countries—would be based on weaker foundations.

How stable do you think the euro is today?

Very stable, as long as it has the political backing of Germany. If the Germans bail, the euro will collapse. If Italy pulls out, it would be a shock, but the euro would probably survive.

But it would have far-reaching consequences: all Italian banks would be affected, with domino effects that are hard to estimate. Politicians must fear this scenario.

The Italian government will probably have the consequences explained to them in detail and, in the end, it will make the same decision as the Greek government under Alexis Tsipras. Tsipras, too, was originally keen on leaving the euro, and possibly even the EU. But after carefully calculating the consequences, Greece decided not to implement such a drastic solution for its people. That would be the only way for Italy to get out of the euro. In the short term, it would certainly be much more of a dramatic change for Italy than for other countries. I don’t deny that Italy’s withdrawal would make sense in the long term. Quite the opposite! But nowadays decisions are only made for the short term, and I don’t believe that Italy would overcome such a crisis in the four years of an election cycle. The long-term fruits of this decision would only be reaped by the next government.

A “breathing” monetary union, as proposed by the German economist Hans-Werner Sinn, in which individual countries can join and leave the Eurozone depending on the state of their economies, would therefore make economic sense, but it would be politically difficult to implement.


Your Spanish colleague Jesús Huerta de Soto is one of the supporters of the euro.

His argument is correct, but his vantage point is different from mine: he is Spanish, and I am German. For the Spanish, the euro is better than their former currency. The common monetary policy deprives the Spanish Government of the possibility of withdrawing from its responsibility for a balanced national budget. The euro is therefore disciplining the Spanish national budget. But in Germany this was already the case without the euro. The euro has brought us only minor advantages along with very great disadvantages. Take, for example, the hidden redistribution via the TARGET-2 accounts.

For Spaniards and Italians, however, the euro means a change of mentality.

Of course. The historical and cultural context is very different. For the Germans, it was always clear that the printing press should not be misused to finance government projects. Germany had a central bank only from the times of Bismarck. The only way to bring the empire together without provoking conflicts between its rivaling factions was through the principle that the National Bank not provide any state financing whatsoever. It was similar under the Habsburg Monarchy. The central bank could never have pursued a policy in which it only subsidized a few vital regions. In France, Spain, and England, on the other hand, financing the state through the National Bank is a tradition that goes back centuries. The Bank of England was founded with the main short-term objective of financing the Crown.

Not only do you criticize the euro, but also the state’s legal monopoly on money. This is a marginal position in current economic debate. Your objection is both economically and morally motivated.

Government coercion is used to expand the money supply more than would be possible under market conditions. An expansion of the money supply inevitably leads to redistribution, the beneficiaries of which include the state and all those who first benefit from the new monetary units, i.e. commercial banks and financial market-related institutions. The losers are all those who are distant from the financial markets. This redistribution is insidious because it is not recognized as such and is still denied by many economists, especially those working in central banks. Moreover, this massive redistribution has no democratic legitimacy. Parliaments haggle over every million when they ratify annual government budgets, while at the same time the European Central Bank expands the base money supply and M3 by 500 billion euro every year—without any debate.

The ECB presumably does this in order to raise the level of price-inflation in Germany.

True, but I contest that rising prices are a desirable policy objective. In economics, I stand on the ground of the classical economists and the Austrian School, both of which have never considered price inflation desirable. In the heyday of German and Austrian economic history—essentially between 1870 and the First World War—we had both the strongest economic growth and price deflation at the same time.

The inflationary culture you criticize shapes all of society. An immediate switch to deflation would hit some sections of society hard.

Sure. Apart from business, all other areas, such as personal and government budget management, are completely geared toward our current price-inflationary environment. Among other things, this leads to debt financing, failure to meet budgets, and dependencies because companies are set up that do not actually stand on their own feet but only exist because of subsidies. In my book Krise der Inflationskultur (Crisis of Inflation Culture), I mention several cultural phenomena, including the haste that characterizes modern economic and social life. For Stefan Zweig, this new haste is characteristic of the interwar period. He described it in his beautiful book The World of Yesterday. The economic reason is that the sooner a resource can be used in a price-inflationary environment, the greater the benefits, because you benefit from the added value of an inflation-hedge.

When someone inherits a large sum of money, how should they invest it today?

A savings account would be economic suicide. But strictly speaking, there are only two possibilities: real estate or stocks. Gold is also an option. Of course, gold is the enemy of all national banks, as the former chairman of the Federal Reserve, Paul Volcker, once openly admitted. As natural money, gold is the natural enemy of all paper currencies. In the long term, therefore, one is always right to invest in gold and silver. However, this depends on the age of the investor: If you are 50 or 60 years old, you should not invest in gold. Every 20 or 30 years there are breakthroughs in the price of gold.

Since the 17th century, the close partnership between banks and states has grown. We have also experienced historically unprecedented economic and wealth growth in that time. At a time of historically unprecedented prosperity, we live today under a flawed monetary order. This seems to be contradictory.

Today we are benefitting from circumstances that have nothing to do with the monetary order. Just think of the progress in information technology and biology, etc. At the same time, with the collapse of communism, we experienced a tremendous expansion of the international division of labor. In earlier times, we would have had double-digit growth rates under such circumstances. But this is not the case. The positive influences are counteracted by negative ones, and I believe that these largely stem from the current monetary system, which facilitates the consumption of capital on a significant scale. Before the 17th century, too, monetary conditions were not ideal. There was also inflation, but via coin deterioration. Glorious moments in the history of European monetary history occurred, for example, in 19th-century France and in the German Empire. There was a large and effective circulation of gold and silver. The population was accustomed to using good quality gold and silver coins. At times, this was also partly the case in urban republics such as Hamburg, Amsterdam, and the Italian commercial republics. Especially in cities with a republican constitution, governments were elected that offered guarantees for the security of these currencies. In the constitution of the Amsterdam Bank, for instance, adequate silver reserves were prescribed. Such phases show us how well things could work today if similar conditions were in place.

Thanks to blockchain technology, the idea of currency competition was once again on everyone’s lips. Now you are emphasizing how precious metals are such good currencies because, unlike paper money, they also have a non-monetary value. Bitcoin and other block-chain-based currencies are no different from fiat money in this respect. Can good currencies arise from this?

At the moment, none of these are currencies. Money is by definition a commonly used medium of exchange. If Bitcoin could be called a medium of exchange, so could Google and Apple shares. But although the market is even bigger there, we would not speak of money types in the case of Apple and Google shares. The creators of Bitcoin wanted to create a virtual money, but right now it is more of a virtual good which—and here I am on the same page with the Bitcoin proponents—does have some kind of “intrinsic value” because it provides certain benefits and services, especially in countries with draconian capital controls. This is where Bitcoin has real advantages that gold, for example, does not have. I find the blockchain technology on which Bitcoin is based to be interesting and potentially revolutionary. But this does not have much to do with Bitcoin. For example, you could also put a blockchain-based gold currency into circulation.

Would that be some sort of new gold standard?

Yes. You would have 100% reserves as a constituent element. And you can do even more with blockchain. Take, for example, owning shares. The way securities are traded today is based on a system that was created in the early 1970s. Since then, all shares in the U.S.—and in Germany and France even before that—have been held centrally; the nominal owner no longer sees them, as was customary before. The reason for this was that stock-exchange turnover became so high that lawyers were no longer able to keep up with their work and failed to make entries in the shareholders’ register in a timely manner. Blockchain would be a very elegant solution to this problem. Without a central office, blockchain-based share ownership could be made possible, and the titles could be traded without going through an organized stock exchange. Ultimately, of course, the basic problem is simply shifted: Who is the guardian? The moment you apply blockchain not only to purely virtual objects like Bitcoin, but also to real estate and securities, someone has to make sure that no fraud takes place.

The bottom-line is that currency reform remains difficult to implement.

Everything that brings us towards a better monetary order directly involves a terrible economic crisis. This is because large parts of the financial markets depend like drug addicts on cheap loans from the printing press. They would have to undergo a dreadful withdrawal if the quality of money improved. Moreover, in today’s debt-based economy, you have armies of auditors and lawyers. But if sound money comes and debt gives way to equity, then you no longer need all these people. Large sections of the intellectual professions would be affected.

In the 1990s, you criticized currency competition, as proposed by Friedrich Hayek in The Denationalization of Money. What is your objection?

The way Hayek imagines the introduction of a new kind of money is problematic. In a first stage, he would issue “ducats” with the promise to redeem them into dollars at a fixed exchange rate. Then, in a second stage, at some point, he suggests that this promise would have to be rescinded, so that the ducat become a money in its own right, independent of the dollar. This procedure is highly troublesome. A breach of contract is supposed to be the origin of competition in the currency market? I think this is the main problem. Hayek correctly saw that the redemption promise gives value to his ducat. He also saw that, for the ducat to become an asset in its own right—in other words, no longer just a debt instrument—the promise must be withdrawn, or contract law must be violated.But this is only possible in the form of government intervention – the opposite of a free market.

Another problem is that Hayek imagines currency competition as concerning only purely intangible currencies that have no intrinsic value. But what happens when the exchange rate of such a currency starts to depreciate relative to other currencies, especially gold and silver? The depreciation is likely to feed on itself, to become ever stronger, without any stopping point. Things are very different in the case of gold and silver, where there is always a such stopping point. Because there are also non-monetary uses for gold and silver, their value and exchange rate cannot fall to zero. It’s different with intangible or virtual currencies. These were my objections at the time.

You rely heavily on Mises and Murray Rothbard as Economists. What makes them different?

I think that Rothbard actually wrote the best textbook on economic theory to this day, Man, Economy, and State in 1962. Only very rarely can you say that about a textbook after so many decades. The reason is that the foundations of neoclassical economic theory have not changed since then. The theories that Rothbard criticized at the time, and in contrast to which he developed a realistic approach, are still taught today. The basic elements of Paul A. Samuelson’s Economics can still be found today in the textbooks for the first three years of economics. John Maynard Keynes, of all people, who always mocked economic orthodoxy, has himself created the most long-standing orthodoxy in economics. As a consequence, it is still worthwhile to read his former critics . That is why Rothbard and even Mises are still relevant today.

Of course, the Neoclassical period does not only consist of Keynes.

Modern economics has two completely different influences: On the one hand, it is based on a particular view about causal relations, a view that we find in its pure form in Keynesianism. On the other hand, it follows positivism, which uses the modelling of causal and functional relationships to apply the methods of the natural sciences to economics, which is to be tested by means of observations. This accounts for a large part of today’s economic research: economists develop models that find mathematical expression, and then they use econometric techniques to test the extent to which these models correspond to observed reality.

In contrast, you are still a supporter of the “Austrians.”

The importance of the Austrian School—starting with Carl Menger—lies in the fact that it preserves realism—a way of thinking about social conditions and causal relations that was dominant up to the end of the 19th century, but which has fallen out of fashion today. In this respect, the Austrian School continues classical economics. This realism, which is particularly pronounced in Menger and Mises, is my inspiration.

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