Parallel Currency Idea Out of Europe and Parallel Lessons For US States

Posted by Jeff Carter
on January 11th, 2011

Michael Butler proposes a parallel currency idea today in the Financial Times. Print more money. What could go wrong? In reality, it’s an intriguing idea on paper. However, once it’s put into practice, I doubt seriously if any government has the discipline to make it work.

Over the course of the last ten years, the euro has integrated the national debts of countries more than it has united cultures or people. Each Euro country owns billions of every other countries debt. That makes unwinding the Euro extremely sticky. If the Euro were to blow up, they would have to reprice that debt in national currencies causing a massive shock to the entire Eurozone.

The European problem is simple to illustrate. The Germans have integrated the former communist East Germany into their system. Integration came at a great cost to the Germans. Germany has a recent history with inflation, post both World Wars and anti-inflationary bias is ingrained into their culture. On the other hand, countries in Europe that have Latin as their base language, let’s call them the “Romance Countries”, have not followed the Germanic path to prosperity. Culturally they are far different. Almost an Alfred E. Neumann “What Me Worry?” domestic policy. All of them have very high social safety nets, very difficult and entrenched labor laws, and ever since the formation of the Euro, were able to hide under German coattails and continue their profligate ways of spending. Then came the financial crisis.

Crisis are terrible, but they normally have a way of cutting all the fat out of things. In the Euro countries case, they have resisted. The crisis has caused improper decision making like the Irish government guaranteeing all the bank loans. Romance Country governments continue to put off the inevitable. There is no way to tax your way to prosperity. The only way out is through a massive cut in the size and scope of the social safety net, combined with big cuts in taxes and regulations designed to spur growth in the business sector.

Initially, these cuts look bad from an accounting budgeting standpoint. But, because of the effect of increased economic activity-the budget numbers are surely incorrect. Eventually, businesses will form and GDP will increase. Bare bones of it is people will be forced to make a choice, work or die. They will choose to work. It sounds inhumane, but they will be working for themselves, not a government or king. That’s an important difference.

In the parallel currency idea, the Euro would still exist. However, individual countries would have their own national currency. That national currency would have a managed float against the euro, similar to how countries peg their currencies to the dollar today.

Managed floats mean humans or bureaucrats decide where the market should be, not a bunch of entities competing for their own self interest and trading to set the value.

Again, on paper it works. In practice, who doesn’t think there won’t be huge political machinations when it’s time to decrease the value of the Lira/Euro peg and cause some inflation in Italy due to the overspending of their government?

The alternatives are not any brighter. They are, high inflation in Germany and the irresponsible countries or depression in the irresponsible countries, while Germany muddles on.

Creative accounting can only take a country, or a company so far. Eventually, the accounting anomaly has got to come to light. The irresponsible countries of Europe are no different than Enron. The only way out is to choose the path of least pain. Each country needs to act for its own best economic self interest. For Germany, it might be leaving the Euro.

And yes, these lessons all have parallel lessons for individual states in the US like California, Illinois and New York.

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