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How to save the Euro

Even at this late date the euro can be saved.  And it can be saved with each nation of the Eurozone retaining political sovereignty.  However, it isn't possible if the current financial system is retained, a system that allows the creation of money at will, or whim.

The European central bank has to become a true central bank, and the Euro has to become a hard currency.  Not a hard currency because it is backed with something, but a hard currency because it has a fixed value.

What do I mean by a true central bank?  A bank that manages the money supply, ensuring that it aligns with the actual wealth of society.  Every month it determines the amount of wealth produced, the amount used, and the amount that became obsolete and wore out.  And the net of all that is the amount of money it produces.  Its sole task is to keep the amount of money in society and the amount of wealth in society in synchrony.

The fixed value of the currency has to be in terms of energy.  This is the unit of measure that the universe uses, and so is the natural choice for such a role.  This is also the basis of the gold standard, though actually using gold is infeasible in the modern world.  Using energy also allows an easy way to determine the output of the economy: measure energy consumed and apply a factor to it.  Such empirical means would allow the system to function until economists could come up with better methodology.

How would this work for the Eurozone?  The European central bank would determine monthly the net wealth increase for each nation.  It then disburses to the central bank of each of them that amount, less their share of the costs of maintaining the central bureaucracy.  This builds in a natural check on the growth of the central bureaucracy since each nation will want as much to spend as possible.  Once the disbursement is at the national central bank, the national government determines how it will be apportioned.  They will take some portion as a tax to run the government and its programs, and allow the national central bank to auction the rest to the highest bidders.  Can bidders from outside the nation participate?  Certainly, for it is in the nation's best interest that the highest price be paid for money representing the wealth they are producing.  The national government might initially have a tendency to confiscate a large percentage of the wealth for consumption.  They will soon find the amount of wealth their nation produces falling, and thus correspondingly, the amount they have to spend decreasing; they are eating their seed grain.  It might also be the case that foreigners win the bid for most of their wealth;  that is a signal that their economy is becoming uncompetitive.

Initially, of course, the central bank of each country would be credited with the value of the total wealth of their nation.  Or at least the amount above their current supply of Euros.  This creates the pool of money available for lending.  After it is auctioned by the nation's central bank.

Nations can still borrow in the international markets.  But they no longer have the wealth and credit of the other Eurozone nations backing them, only the wealth that their nation produces.  And that is publicly known every month.  If they behave irresponsibly, it only affects them and does not damage the other members.

Implementation of this solution leads to immediate recession, possibly default, of the profligate nations, of course, as wealth and money are realigned.  With all the hardship that implies.  But the default is contained.  And once the banks fail or are bailed out, it can never happen again.  And the defaulted nation doesn't have to leave either the Eurozone or the common currency.  Each nation is financially isolated, while still a part of the political and monetary union.

In case it isn't obvious from the above, adopting this solution precludes fractional reserve lending; only those who have wealth can lend it.  This is also what would preclude extreme booms and busts.  The system is naturally regulating because the supply of money is limited.  If an investment fails, it doesn't bring the system to crisis because it isn't leveraged.  And if it succeeds, the money representing that wealth becomes available after the next monthly disbursal, and it is real money.

Without an income tax, it isn't easy for politicians to manipulate the economy either.  Social engineering becomes explicit; to redistribute wealth they have to directly confiscate it from those who have it.

When I say money above, I mean the electronic representation of money, and not currency.  The relationship between the two is that the amount of currency in circulation is less than or equal to the amount of money.  While it is important that currency be tracked in a separate account at the central bank level (both national and European), the amount  of currency relative to national wealth will be low.  I envision it as three accounts: total wealth, money, and currency.

Looking at the current financial system with the above perspective, it becomes obvious why it is failing;  there is no check on the growth of money, the growth of debt, so there is only a loose relationship between wealth and money.  Current economic orthodoxy is that allowing the creation of money on demand, out of thin air, allows for faster economic growth.  And this might be true in the short term.  However, what current economic orthodoxy doesn't recognize is that this inevitably leads to a crash, a financial crisis of some level of severity, when the false relationship is exposed.  The severity of the resulting crisis depends upon how misaligned wealth and money have become.  And it doesn't recognize that any gains in growth are wiped out by these avoidable crises, not to mention the harm done to the members of society by this constant unnecessary upheaval.  Oh, the orthodox allude to the business cycle, but they think of it as a given, not recognizing that it is only a consequence of the way the financial system is designed.  This cycle benefits the financial operators, the con artists, the gamblers, at the expense of the prudent and productive.  The orthodox will tell you that this tradeoff allows for a greater rate of innovation.  But does it really?  It is certainly more exciting.  However, I think that over the long haul a stable and predictable investment environment, along with a steady growth in wealth, leads to greater gains.  Imagine a sustainable 'great moderation' continuing for a century instead of a debt fuelled binge ending in the 'great recession' that stalls the economy for a decade.