Cyprus, the EU and Competing Currencies

There have been many critiques over the European Union from many different quarters over the decades since its inception. With the seizure of cash from customers of banks in Cyprus, the worst threat imaginable has now come to pass for Euroskeptics. Economist Frederic Sautet explains how the heist has so far gone down:

Some depositors at Cyprus’ largest bank may lose a lot of money (e.g. see article in FT). Those with deposits above €100,000 could lose 37.5 percent in tax (cash converted into bank shares), and on top of that another 22.5 percent to replenish the bank’s reserves (a “special fund”). Basically “big depositors” are “asked” to pay for (at least part of) Cyprus’ bailout (the rest will be paid by other taxpayers in the EU).

I cannot think of a faster way to completely destroy a banking system than to expropriate its depositors. This is the kind of policies one would expect from a banana republic, not from a political system that rests on the rule of law. But this is the point: the EU does not respect the principles upon which a free society is based.

An economist over at ThinkMarkets also has a good piece on the Cyprus heist. The EU has taken an incredibly good arrangement – free trade throughout Europe – and turned it into an attempt to unify Europe into a single behemoth of a state. And all under the auspices of “federalism.” This is a bad development for a number of reasons.

  1. It gives free trade and free trade agreements a bad name
  2. It gives federalism a bad name
  3. It encourages nations-states to engage in isolationist behavior
  4. It is horrible for the global economy

These are just a few reasons, of course, but I think readers get my drift. I’ve mentioned it here before, and I’ll probably go over it again, but the EU as an interconnected economic entity is a great thing for the world. It is the attempts at political integration (centralization) that have caused so much harm to the world.

Last year around this time I mused about the benefits of having national currencies competing against each other within the EuroZone as the second-best option to completely private banking. At the time I was a bit of unsure of the soundness of this proposal, but Sautet seems to have similar thoughts. He lucidly explains the benefits of currency competition within a free trade zone:

Until the euro came along, countries with bad public policies would simply devaluate their currencies. The French government, for instance, devaluated the franc twice (in 1981 and 1982) under Mitterrand’s presidency and in 1983 the Deutsche mark and the florin were reevaluated against all the other European currencies. Under this system the consequences of bad public policies are internalized to a large extent. The euro changed that. Bad policies are now either kept in check at the country level because no currency devaluation is possible (that’s the positive scenario), or the consequences of bad policies are born by the entire system.

[…] greater [political] centralization would fail because at the end of the day, EU institutions are not geared towards market-preserving federalism. The dominant thinking is one of indicative planning, regulation, and neo-mercantilism […] Trade zones enable political competition, which leads to virtuous outcomes such as lower taxes and lower public spending. Moreover, free trade zones with freely competing currencies, even if they remain government produced (one could adopt the Deutsche mark anywhere in the zone for instance), would bring vast positive benefits to Europeans.

Read the whole thing. He also has some great insights into federalism. For what it’s worth, I had the pleasure of attending a seminar where Dr. Sautet lectured. It was put on by the Institute for Humane Studies, a nefarious Kochtopus-funded think tank that runs thought-provoking seminars for undergraduates over the summer.

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