After its first few days as the official currency of 12 nations, the euro is looking pretty good. Its value is up to almost 90 cents against the U.S. dollar. The British are worried by the pound’s quick plunge in value against the euro after one of Tony Blair’s ministers pish-toshed the idea of the pound surviving independently, but the Brits shouldn’t worry. The euro’s creation is more a political exercise than a revolution in monetary policy. The European Union (EU) intends to challenge America’s financial dominance of the world’s markets, and that’s OK. Real, unsubsidized competition is good, and the U.S. economy does well against it.
But the logic of the euro goes only as far as the premise for its creation: to combine smaller economies into one that makes Europe equal to America in the competition to create wealth. This premise just doesn’t go very far. The value of any currency is directly related to the strength of the economy that supports it. The U.S. dollar is strong because the U.S. economy remains the most free and vibrant in the world. In the case of the euro, the whole is less than the sum of the parts.
That is true mainly because the economies of the EU themselves are based on government regulation rather than free trade and deregulation. Take France please. France’s euro distribution was almost stalled by a strike of bank workers upset that their government-mandated work week of 36 hours was by the government extended to other workers. The bank workers now want an even shorter week because, well, because they’re bank workers. How about prevailing corporate tax rates? In Italy, Belgium and Germany, corporate profits are taxed at about 40 percent. Those economies even Germany’s are not growing nearly as fast as they should be. Contrast this with the Celtic Tiger: Contrarian Ireland, with corporate taxes in the 10 to 15 percent range, is, quite simply, booming. The EU’s answer to this unsurprising phenomenon can only be called eurologic. Instead of asking its statist members to cut taxes, it pressures the Irish to raise them. It’s as if your neighbor’s house were on fire, and he asked you to help by setting fire to your own.
That kind of thinking is what might doom the euro in the long run. When confiscatory taxation creates economic weakness in a small economy, the weakness cannot be remedied by marrying that small economy to others that have high or higher taxes. If the EU ever figures this out, it could well challenge America’s financial strength. However, there is no reason to believe the EU will.
Eurologic is what will cause the undoing not only of the euro, but of the European Union itself. Little by little, the EU seeks more power over its members. Will there be mandated uniform tax rates? Will employers and employees be prevented from agreeing on the length of the work week? None of these questions need be asked where there is free trade and deregulated markets. The bureaucrats running the EU don’t understand that. If only they would listen to the Irish.