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“Suppose things go badly, and Italy is in trouble” – Milton Friedman on the Euro in July 1998

…the more likely possibility is that there will be asymmetric shocks hitting the different countries. That will mean that the only adjustment mechanism they have to meet that with is fiscal and unemployment: pressure on wages, pressure on prices. They have no way out. With a currency board, there is always the ultimate alternative that you can break the currency board. Hong Kong can dismantle its currency board tomorrow if it wants to. It doesn’t want to and I don’t think it will. But it could. But with the Euro, there is no escape mechanism.

Suppose things go badly and Italy is in trouble, how does Italy get out of the Euro system? It no longer has a lira after whatever it is – 2000 or 2001 – so it’s a very big gamble. I wish the Euro area well; it will be in the self-interest of Australia and the United States that the Euro area be successful. But I’m very much concerned that there’s a lot of uncertainty in prospect.

Professor Milton Friedman interviewed by Radio Australia, 17 July 1998

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6 comments to “Suppose things go badly, and Italy is in trouble” – Milton Friedman on the Euro in July 1998

  • Paul Marks

    The Euro was sold to countries like Greece and Italy on two grounds.

    One was ideology – the “European Project” to create a country-called-Europe.

    This has no economic theory content – and so need not detain us (it is just demented nonsense – actually part of the demented one-world-government sillyness that the international charter of “Human Rights” and even such things as the IMF and the Basel bank rules are part of).

    But the other idea by which the Euro was offered to these countries was as followers…..

    “You will be able to borrow at lower interest rates”.

    This actually has some economic theory content – the idea being that, with the threat of just printing local currencies to “repay” debts removed, less money can be devoted to paying interest on debt (because the interest rates will be lower) and so more money can be devoted to spending on all the things govenrments like spending money on (health, eduction, pensions and so on).

    For awhile it actually worked – but the the governments just carried on borrowing (as they had done before) and lenders eventually worked out there was no way they could repay their debts (at least in the case of Greece – and, perhaps in the case of ……).

    So interest rates started to go up (as lender needed to be paid more in order to be willing to risk their money) and…….


    What should be done now?

    Mr Prichard (of the British Daily Telegraph) suggests that the European Central Bank “use its full firepower” – i.e. create even more funny money to buy up government bonds.

    In short (although Mr Prichard does not actually say this) that the European Central Bank should become like the old Bank of Greece or Bank of Italy (when they had control of money production).

    The Germans objecting to a policy of even more currency inflation?

    Mr Prichard has an answer – the Germans should be “crushed into submission” by the United States and China.

    It is possible (reading the above) that Mr Prichard is a Keynesian – both because of his economic doctrine (basically create-more-money) and because of his desire to destroy German democracy (J.M. Keynes himself celebrated the destruction of freedom in Germany – with his praise for the new totalitarian government, written in the introduction to the German edition of the “General Theory….” of 1936).

    However, the German government also wishes to, de facto, destroy the German democracy.

    It will not allow the German banks (who have lent money to various goverments – partly out of stupid greed, and partly because political pressure and REGULATIONS said they should) close their doors.

    On the contrary the German government will find someway to keep the doors of the major banks open – regardless of the cost.

    This is clearly incompatible with democracy (as no matter who the Germans vote for – the policy of bank bailouts will continue) as well as being incompatible with civil society.

    For a situation where the major banks do not close their doors (do not really go bankrupt) is clearly not a civil society – it is some form of Corporate State.

    Even if unlike Greece (and Italy?) a Central Banker is not made Prime Minister – i.e. if at least the outward illusion of constitutional government (with the democratic idea that the people choose the head of government) is maintained.

  • Paul Marks

    Almost needless to say – Britain and the United States have already failed this test.

    The major banks got into trouble (yes, I admit, they were led down the path to bankruptcy by the easy money policy of the Central Banks – but the fact remains the major banks should still have gone bankrupt) and the governments bailed them out – AGAINST THE WILL OF THE PEOPLE.

    And it would not have mattered which political party the people voted for – the bailouts would still have happened.

    This means that the problem is systematic (not a problem of the “wrong people being in charge”).

    Yes there would have been terrible economic suffering if the major banks had closed their doors in 2008 – but such suffering is going to happen anyway (it will just come in a different way – and be worse).

    However, the people clearly had no choice over what policy was to be followed. And this is not some minor matter – it is a matter of truely vast sums of money.

    So (equally clearly) the United States and Britain are neither consittutional states or democracies (not the same thing of course – but they are neither).

  • Johnathan Pearce

    When you consider how prescient MF was about so many issues, it is astonishing that some of those characters at the Von Mises Institute denigrate him and make out that he is not as influential as Murray Rothbard.

  • lucklucky

    It seems that Milton Friedman is upset that Italians can not do Monetary Socialism.

  • Paul Marks

    What is good in Rothbard (and he was right about certain very important things that Friedman got wrong) is from Ludwig Von Mises (not the institute – the actual human being).

    And Ludwig Von Mises did not have absurd opinions about World War Two, the Cold War (and so on).

  • Craig

    Ol’ Milty had his fiat-currency down pat.