THE TRAGEDY OF THE EURO
By Philipp Bagus
Copyright © 2010 by the Ludwig von Mises Institute
Every state has its own ruling class and connected interest groups. Consequently, the ruling class in Germany and the ruling class in France may have more in common than the German ruling class and the exploited class in Germany. In fact, the German ruling and exploited classes have opposite interests. But there are many areas in which the French and German ruling classes are not competitors and actually may beneﬁt from working together. Both ruling classes want power: they want to expand their power vis-à-vis their citizens. They want an ideology to prevail that favors the state and an increase in the state’s power. Given the above considerations, it is easy to understand why the German ruling class, i.e., politicians, banks, and connected industries, especially exporters, favored the introduction of the Euro.
There were many ways it could beneﬁt from a single currency.
1. The ruling class most likely did not regret geing rid of the
very conservative Bundesbank. The Bundesbank had acted
several times against the interests and pleas of politicians. It
raised interest rates before elections in, for instance, in-
creasing its reputation as an anti-inﬂation central bank world-
wide. In addition, the Bundesbank did not want to follow the
inﬂation rates of the US and stopped interventions in favor of
the dollar in March of 1973. This led to the ﬁnal collapse of
the Bretton Woods System and ﬂuctuating exchange rates. It
also resisted the establishment of an obligation to intervene in
the EMS. Bundesbankers repeatedly resisted demands made
by German and foreign politicians for a reduction of inter-
est rates. Some Bundesbankers were also skeptical about the
introduction of the Euro as an instrument toward economic
integration. Leading German politicians often had the bur-
den of dealing with the discontent of their neighbors and the
uncompromising monetary stance of the Bundesbank. The Euro allowed German politicians to rid themselves of stubborn Bundesbankers, promising the end of the bank’s “tyranny.”
More inﬂation would mean more power for the ruling class.
German politicians would be able to hide behind the ECB and
ﬂee the responsibility of high debts and expenditures.
The Euro was a step toward the establishment of a world
currency. With all currency competition eliminated, politi-
cians would have unlimited power. Moreover, international monetary cooperation is easier to achieve between the Fed and the ECB than it would be between the Fed and several
European central banks.
2. Certain German interest groups stood to make gains for them-
selves, namely, an “advancement” of European integration in-
cluding the harmonization of labor, environmental and tech-
nological standards. Indeed, the introduction of the Euro
saved the European project of a centralization of state power.
The harmonization of labor standards beneﬁted German union-
ized workers. High labor standards in Germany were possible
due to the high productivity of German workers. Workers in
other countries such as Portugal or Greece had less capital
with which to work, making them less productive. In order
to compete with the German worker, the Portuguese needed
lower labor standards, which reduced the cost of their labor.
The lowering of labor standards—widely feared as “a race to
the bottom”—threatened the high labor standards of German
workers. Unionized German workers complying with high la-
bor standards did not want to compete with Portuguese work-
ers for whom compliance was not required. The competitive
advantage gained by the harmonization of standards would
give German unions leeway to extend their power and privi-
The harmonization of environmental standards also beneﬁted
German companies because they were already the most ef-
ﬁcient environmentally. Competing companies from other
countries with lower standards had to adopt these more costly
standards. Moreover, Green interests were satisﬁed by the
imposition of German environmental standards on the rest
of the European Union. German companies were leading in
environmental and other technologies and proﬁting from this
regulation. Imposing German technological standards in the
EU gave German exporters a competitive advantage.
3. German exporters beneﬁted from an inﬂationary Euro in a
dual way. Other Eurozone countries could no longer devalue
their currency to gain competitiveness. In fact, currency crises
and sudden devaluations had endangered German exporters.
A currency crisis also put the common market in jeopardy.
With a single currency, devaluation would no longer be possi-
ble. Italian Prime Minister Romani Prodi employed this argu-
ment to convince German politicians to allow a debt-ridden
Italy to join the monetary union: Support our membership
and we’ll buy your exports.
In addition, budget and trade deﬁcits of southern countries
made the Euro consistently weaker than the Deutschmark
would have been. Higher German exports were compensated
for by trade deﬁcits of uncompetitive member states. As a
consequence, German exporters had an advantage over coun-
tries outside the Eurozone. Increases in productivity would
not translate into appreciations of the currency, at least not
when compared to the Deutschmark.
4. The German political class wanted to avoid political and ﬁnan-
cial collapse. Many countries in Europe were on the verge of bankruptcy in
the 1990s. As the ruling class did not want to lose power, it
was willing to give up some control of the printing press in
exchange for survival. Countries with less debt such as Ger-
many would guarantee the conﬁdence of creditors, so that the
overall level of European debt could be maintained or even ex-
panded. This certainly explains the interest of highly indebted
countries at the verge of bankruptcy in European integration.
The ruling class can extend its power by increasing taxes, using
inﬂation, or through higher debts. But taxes are unpopular.
Inﬂation also becomes disruptive when at some point citizens
ﬂee into real values and the monetary system is in danger of
collapse. Debts are an alternative to ﬁnancing higher spending
and power and they are not as unpopular as taxes. In fact, there may be a “government bonds illusion.” Citizens may well feel richer if government expenditures are ﬁnanced through
bonds instead of through taxes. Nevertheless, they have to be
ﬁnanced at some point via inﬂation or taxes, lest creditors close
the overly indebted government’s money stream.
But why would Germany take on the role of guarantor?
Introducing the Euro and implicitly guaranteeing the debts of
the other nations came along with direct and indirect trans-
fers of the Eurosystem. Bankruptcy of the European states,
which would have had adverse effects on the German ruling
class, could be averted, at least for some time. A collapse of
one or several countries would lead to recession. Due to the
international division of labor in Europe, a recession would
hit big exporters and established companies even in Germany.
Tax revenues would fall and the support of the population
would be reduced.
Moreover, the default of a country would probably affect neg-
atively the domestic banking system and have a domino effect
on banks all over Europe, including Germany. e connectiv-
ity of the international ﬁnancial system might lead to the col-
lapse of German banks, close allies of the German ruling class,
and strong supporters of a single currency. A bankruptcy in
form of hyperinﬂation would equally negatively affect inter-
national trade and the ﬁnancial system. Sovereign bankrupt-
cies could take governments down with them.
introduction was all about power and money. The Euro brought the most important economic power tool, the monetary unit, under the control of technocrats.