Europe Isn’t Going To Run Out of Euros

The Eurozone is currently afflicted by a number of problems, one of which is unduly tight monetary policy. Looser money would directly bolster depressed “peripheral” economies in the short-term, would also facilitate relative price shifts between the core and periphery that are needed to resolve internal imbalances, and would help prevent countries like Spain and Italy from sinking into self-fulfilling prophesies of national defaut. Rather than directly provide the kind of loose money the continent needs, the European Central Bank has opted for a Rube Goldberg machine in which it gives free money to European banks on the tacit understanding that they’ll use a lot of the money to buy European sovereign debt. This strikes me as a moderately ill-advised and moderately corrupt way of going about things, but it’s not a Ponzi Scheme:

Describing it as a “Ponzi scheme”, Marc Chandler, currency strategist at Brown Brothers Harriman in New York, says simply: “Weak banks are buying weak sovereigns.”

I think it’s helpful when understanding these issues to use the proper names for currencies. European banks are being given Euros by the European Central Bank and they’re using their Euros to buy Euro-denominated debt issued by Eurozone sovereigns. This is an odd way to conduct monetary policy, but it’s not an unsustainable Ponzi Scheme because the European Central Bank can’t run out of Euros. If Europe operated on the gold standard, people might worry that the ECB doesn’t have enough gold to credibly back the Euro and there could be runs and collapses and panicks and all that other good stuff from the interwar period. But that’s not the case today. The worst that can happen is that foreign currency traders and “currency strategists” might come to feel that they don’t want to buy Euros. And bully for them. But a cheaper Euro would help solve Europe’s problems by bolstering export industries in France, Spain, and Italy.