Authors Forum: Tragedy of the Euro & Deep Freeze

0:00Good morning to everyone. Let me first speak about this book, The Tragedy of the Hero. Who's the audience for this book? Everyone who wants to know where the hero came from and where it is probably heading. So for investors, economists, students, laymen, actually the style I think is, or many readers have commented to me that it reads like a novel that was the intention that everyone can understand it. Also for people who want to know how the euro system works and what are the differences between the FED and the ECB.

0:42What are the differences to other books that are on the euro? Well, most books on the euro get it wrong.

0:52And another difference is that even though some get some facts They don't get the interpretation of the facts right because they don't use Austrian theory to interpret these historical facts. So this is the only Austrian libertarian book on the euro. I first wanted to call it the case against the Fed, the case against CCB, like Rothbard's book. So I'm looking there on the political interests from a libertarian point of view, calling the Euro for what it is, a political project, and I analyze the interests of the political elites of different countries.

1:39And then I apply also Austrian business cycle theory and Austrian monetary theory to the Euro. So, it's a unique combination that no other book has because it looks from a libertarian perspective on the politics of the euro and from an Austrian perspective on the monetary setup of the European monetary system. So to give you a short summary of the book, it explains why the euro system almost collapsed or is still at the border of collapsing. Many people have the intuition that there is a monetary redistribution going on in Europe, but they don't understand how it actually works.

2:25So to understand all this, I approach the Euro from two sides, as I said. I approach it from the political side and from the monetary side. I begin with the political side. There are two visions about the European Union, how it should be. There's the libertarian one and the socialist. The libertarian one wants a free trade zone in Europe, a free movement of capital, goods and persons. In the beginning, the EU or the European community was closer to this vision. The founders were relatively closer. Political parties, Christian Democrat parties in the different countries are closer to this vision. and northern countries, Netherlands or Germany are closer to this side.

3:14On the other side, there's a socialist vision for Europe who sees it as an, should become an empire, protectionist to the outside and interventionist inside. So a harmonization of taxes, tax rates, building a European super state. and State. This vision is more defended by people like Jacques Delors or François Mitterrand. It's not a new idea because Charles the Great, Napoleon, Hitler and Stalin, they all had tried to achieve a European empire, one big European state. They all failed. So now the and the idea is to achieve it through political means and not outright military violence.

4:05And the idea is to use crisis that come up to expand systematically the power of the central government. Socialists of all parties are on this side of the battle, and a coalition of governments normally led by the French government, who after the Second World War wanted to make up for, first for the humiliation of 1940, and then also for the lost colonies and built an empire in Europe. So there was a struggle between the two. The socialists gaining power slowly, but then there was a fatal change in the dynamics.

4:53It was when the German war came down, the Berlin war in 1989. Because with this, the power would change because Germany would get stronger and Germany was, as I said, closer to the libertarian side or opposed to the empire side. And also Eastern European countries were coming and wanted to join the European Union and they of course were fed up with empires and central governments and the socialist vision. So the danger for the socialist side was that the evolution would go towards a big free trade zone in Europe. So they took a one step forward that was towards centralization, that was the introduction of the single currency, that as we see produces crisis that then are used for political integration.

5:50Especially France was pushing this, it wanted to get, the French government wanted to get rid of the discipline of the Bundesbank. The Bundesbank was, after the Second World War, it was the most feared institution, after the Wehrmacht in Europe. Because it was when the Bundesbank raised interest rates, France had to raise interest rates as well. Because otherwise, the French form would devalue something very embarrassing for the Bank of France. So as the Bundesbank was relatively, the German Central Bank was relatively restrictive with Monetary Policy. The Bank of France had to follow and could not as much as is wanted.

6:36So this posed a limit for the French government spending, because the French central bank couldn't monetize as much as it wanted. So indirectly, Germans were limiting, or the Bundesbank were limiting the French government spending. So the losers of the war would limit the government spending of the French government, of France, which of course is scandal from their point of view. They actually, in negotiation, French politicians started to talk about the German atomic bomb. The Germans answered, well, but we are not allowed to have atomic bombs, and you know that. Yeah, but we refer to the Deutschmark.

7:25So the wall came down and the archives were opened September and it's, so it's pretty clear that, now it's proven that François Mitterrand, in order to give the permission for German reunification, he demanded a single currency, the euro, and of course he could do this because there was still no official peace treaty. Franz was much military stronger, Germany was still occupied. He actually referred to, if we don't do this step ahead now, we get to a situation similar to 1913. But finally, he gives the permission to reunification exchange for the D-marks, which, of course, was an important victory for the socialists because it provokes debt crisis that lead then to centralization.

8:23And the end of the Euro would probably, indeed, be the end of the socialist vision for Europe. And that is why they do everything to defend it. What were the advantages for the peripheral countries, or military, look, met? Well, first, as I said, they could get rid of the Bundesbank discipline with the Euro. They could get direct control on the monetary machine in all over Europe. They could get the prestige of the Bundesbank. These governments had to pay lower interest rates, which allowed them to have higher debts and deficits, could make use of monetary redistribution, and got a stronger currency, which allowed them for cheaper imports. Why did the German government accept this?

9:11Well, first of all, because of this reunification. Then the whole German population was against it. Economists were against it. some lawyers also that said it was unconstitutional. But the politicians, the elites, of course, they wanted also to get rid of the Bundesbank because they were putting a limit on their government spending. There were also, of course, interest groups that are in favor of a harmonization of different labor and environmental standards in all over Europe that would benefit from that big business, Big exporters also, and also the politicians wanted to prevent a sovereign collapse, because what we are experiencing now probably would have happened much earlier without the euro and would have affected the whole European banking system.

10:05But then there's the monetary side that I discuss also in the book, I argue it's a tragedy of the commons, the euro, it has self-destroying tendencies, in my Rothbard Memorial Lecture The Euro also provokes conflicts because it's not a free trade zone anymore. For example, Greece can print government bonds, euros, pays a public sector, which then buys, which becomes un-competitive, it's not competitive. It used to use to buy German cars, so it's Then, German cars going to Greece, newly printed euros going to Germany or debts that are not paid. Of course, then there are conflicts arising between nations.

10:55Germans call Greeks lazy and Greeks demand more reparations for the occupation in the Second World War. Then I also talk about what happened last year in detail, how the ECB lost all its credibility, how it first said it would not lower the minimum ratings for government bonds and then it did. It now accepts Greek bonds even though they are rated junk. It said it would not buy directly government bonds and it does. So it has totally become an instrument of politics. Politics. What will the future bring? I also talk about this, but I'm not carrying this away here. The other book, Deep Freeze, co-authored with my good friend David Howden and was an attraction by Toby Baxendale. What is the audience for this book? Well, everyone who is interested in probably the most spectacular collapse of a whole nation in financial history.

12:05We will also see that what happened in Iceland is basically the same that happened in Europe and the U.S. but on a much bigger scale and which another ingredient that is currency mismatching which explains why the government could not save its financial system. It's also easily written, so students, academics or laymen can read it. Why is it different from other books on Iceland? Well, it's again the only thorough Austrian libertarian analysis of the incident. Other books, they tell more anecdotes. There are some books written by ex-bankers, Icelandic bankers, and then they say how they lived in luxury in the boom, and how they got bankrupt, tell little stories, but there's no theory in it and we have much theory to explain it.

13:08And many other books or commentators explain it with greed, that it was the greedy bankers, individual errors, or even free market deregulation that caused the Icelandic collapse. So to give you also a short summary of the book. It was probably the most spectacular bankruptcy in 2008 in the financial crisis. Of course the whole nation was basically wiped out and it was a developed nation. It was the third nation in the human development index. 300,000 people, a GDP of 20 billion and a banking system, financial system that had assets of 10 times its GDP, incredible financial boom, Icelanders stop to fish, they go into banking, then the collapse comes in, yeah some people explain it because they were Fischer, and therefore, when they hadn't experience in finance, so therefore there was a collapse.

14:18Incredible collapse, stock market at 90% down, 18% inflation at some point in 2009. Why was it? Well, because of maturity mismatching and currency mismatching. There was maturity mismatching, what is it? If I borrow short at a low interest rate and I lend long, invest long at a higher interest rate, the danger is of course that I have to roll over the short term debt until I get the funds from the long term. So the danger is that there is a roll over stop. and at this point, malinvestments would reveal.

15:08Why did bankers do that? This dangerous business, of course it was very profitable, because short-term interest rates are normally much lower than long-term. Why did they do it? Because the central bank of Iceland gave them an explicit bailout guarantee And also because of the fractional reserve banking that allows banks to expand credits and ensures in the future much liquidity to roll over. Then there was also currency mismatching. Icelandic banks would end up themselves in the international wholesale markets. So they would borrow in yen, dollar or euros and invest in Iceland. in Iceland. Why would they do that? Because the interest rates in Euros, Yens and Dollars were lower than the interest rates in Icelandic Krona. Why did they do that? This dangerous thing because there was an implicit bailout guarantee by the IMF and other... One banker actually writes that he thought that Iceland is so small, surely they will bail us out if something happens.

16:23So the IMF, with their bailouts, reduce foreign exchange volatility. And this makes this practice less risky. So the combination of these two, maturity mismatching and currency mismatching is of course a deadly mix. As long as the, because what you do is, borrow for three months in yen and invest for 10 years in Icelandic krona. As long as the international liquidity remained high, everything went well. But with the Lehman Brothers collapse, international wholesale markets dried up and it all fell down. There were many malinvestments, for example, in aluminium smelting, in housing, there was a housing financing fund, Banking Fund, close to what Freddie May does, but they give directly to consumers, loans, mortgages, the financial sector expanded.

17:27They also started to buy businesses, international businesses, for example, they bought a stake in EGJet or the soccer club West Ham United, where Iceland was called marauding Vikings, and of course they would buy other companies, monetary as we might call it, monetary violence this time but then it was over consumption also, big parties, luxury electronics, the sale of champagne rose 82% in one year But then the columns of Lehman Brothers all came down, the corona collapsed, basically because the central bank had assets, only loans to insolvent banks and to the insolvent government. And because these banks had debts in foreign currency, the central bank of Iceland couldn't save them.

18:18So here I leave it for the next. Thank you very much. Thank you very much.