NCPA - National Center for Policy Analysis

Freeing Europe from the Euro

July 25, 2012

German Chancellor Angela Merkel and many other European leaders want to defend the euro at any cost. However, the euro is, in fact, one of the major causes of the problems besetting Europe today. Further, maintaining the currency union could cause greater problems in the long run, says Sascha Tamm, a research fellow with the Friedrich Naumann Foundation for Freedom in Potsdam, Germany.

Currently, alternative legal tenders are prohibited, creating a monopoly that is controlled by the European Central Bank. Yet much of the strife caused by the euro could be resolved if other currencies were permitted to be used within the Eurozone.

  • By banning alternative currencies, governments ban the distribution of certain kinds of knowledge and the evolution of certain institutions and procedures.
  • If businesses and consumers are allowed to use only one kind of money, there is no incentive for anybody to consider the quality of a currency.
  • Competition would beget strong incentives to find novel ways for currencies to build and retain users' trust without having to resort to monopoly or coercion.

The introduction of non-government currencies may seem highly unlikely, but it is crucial to realize that in many countries, multiple currencies are already widely circulated. In developing nations, for example, American dollars are regularly intermingled with domestic currency.

Further, the creation of new currencies need not be a burden that is placed on the government. Rather, government regulators and laws can easily enable non-governmental institutions such as banks to issue their own tender by removing statutes that prevent them from doing so.

  • Each bank would issue its own distinguishable currency, and no bank could issue government-made currency unless granted the power to do so by the central bank.
  • Each bank would bear full responsibility for its own brand of money.
  • To succeed in the new currency market, banks would need to find ways to find out how to create and sustain trust in a currency without relying on monopoly and coercion.
  • This would lead to competitive efforts to develop an optimal currency that inspires consumer confidence.

Eventually, this might lead to a future where governments have no currency responsibilities whatsoever.

Source: Sascha Tamm, "Freeing Europe from the Euro," Competitive Enterprise Institute, July 6, 2012.

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