Hurray for the Danes! Jude Wanniski October 4, 2000

Memo To: Poul Nyrup Rasmussen, Prime Minister, Denmark
From: Jude Wanniski
Re: Voting down the Euro

Yes, you did everything you could to persuade your citizens to vote “Yes” on the referendum last week to join the others in the European Union in a common currency, the euro. The fact that they instead voted down the idea, by 53% to 47%, of course disheartened you, according to all reports, but I think you should be proud of your people for resisting all the pleas made to them. The post mortems indicate they voted “No” by that narrow margin because they somehow see the euro as threat to their social programs or a diminution of Danish culture with the passing of an independent currency, your krona. Instead, they wisely understand, perhaps not individually, but in the aggregate, that the design of the euro is flawed and must be fixed before the experiment can develop successfully.

In 1992, when the people of Denmark voted down the Maastricht Treaty, which encompassed the design of the common currency, they shocked the eurocrats who took popular support for granted. The eurocrats could not imagine the Treaty was rejected because the design of the monetary system was flawed, since they had designed it and assumed it was as good as it gets. You yourself, Mr. Prime Minister, must acknowledge that something in the euro must be flawed when it is born at a healthy rate of $1.17 in equivalent U.S. dollars and has now shriveled to US$.87, having gone as low as US$.83 recently. Why should the people of Denmark use as their national money a floating euro managed by the same flawed eurocrats who designed it? They might as well stick with their own independent central bank, giving up the clear efficiency advantages of a common currency rather than also having to give up the power to defend itself against the potential errors of the eurocrats.

This is not a new idea for me, Mr. Prime Minister. As one of the original supply-side political economists in the world AND a follower of the Canadian Robert Mundell who last year was given the Nobel Prize in economics for having originally conceived of the euro in the early 1960s, I have been arguing for 20 years that it is hopeless to think you could think of stitching together eleven different floating pieces of paper into one, and have it work much better than the eleven floating independently. Prof. Mundell has argued consistently that such a “system” is a “non-system,” unless there is some mechanism by which the eurocrats of the European Central Bank can decide day by day if too many or too few euros are in the system. His answer has always been to bring gold -- the most monetary of all commodities -- into the mechanism as a way of making the euro stable over a long stretch of time.

Here is how I put it to my Wall Street clients on September 21, 1992, under the headline “Three Cheers for JBIII,” referring to James Baker III, who took a step toward gold when he was Treasury Secretary in 1987:

“The skin-of-the-teeth Maastricht victory in yesterday’s French referendum is just enough to keep a pulse beating for European economic integration. The very notion of integration without a fixed-rate monetary system -- a common currency, if you will -- is nonsensical. Without it, the EC remains at best a customs union. If a country is to integrate, as the 13 former colonies in the New World did 200 years ago, the countries of Europe must solve the sovereignty problem posed by the inherent flaw of Maastricht. The only solution we can think of that makes any sense is that which Baker offered in September 1987, which would establish ‘a commodity basket, including gold,’ as an independent reference point that would signal which central banks were being too tight, which too loose, and which just right... As in the new United States, this takes monetary policy out of the hands of the elites and puts it in the hands of the people.”

Mundell foresaw the birth pains the euro would encounter because it was not being brought into the world with a gold link. He was a bit careless, though, in assuming the ECB would know how to make adjustments. Last Monday, The Wall Street Journal’s lead editorial quoted from Mundell’s comments at a September 22 IMF panel in Prague in which he put forward a proposal for stabilizing the euro:

Mundell suggests a floor of US$.85 cents and a ceiling of US$1.15 for the euro-dollar rate. Second, interventions would take place in forward markets as well as spot markets. Thirdly, there would be no sterilization; the money supplies would be allowed to change, up or down, within those points. Finally, Mundell suggested the ECB use the gold reserves of its constituent banks to mint a new gold coin -- a “europa” worth 100 euros as legal tender, but overvalued at current gold prices. “It was a mistake,” he said, “to delay for three years the introduction of the paper currency and coins, and the production of a gold currency would heighten general interest in the euro and at the same time put the EU’s excess gold reserves to good use.”

In other words, Mr. Prime Minister, the people of Denmark will continue to resist the euro at every opportunity, until the euro is defined in terms of gold. That will take the power to manipulate its value out of the hands of the eurocrats and keep it in the hands of the people in the marketplace. Three cheers for the people of Denmark!