Denmark and the Euro
Jude Wanniski
October 4, 2000


When the voters of Denmark in 1992 rejected the Maastricht Treaty that encompassed the design of the European Union’s common currency, it was a big surprise to the eurocrats, who took popular support for granted. In a referendum, the French approved Maastricht by the narrowest of margins, but the Danes turned thumbs down, as they did again last week by a 53-47 margin. The EU establishment now is saying this is no big deal, that it was no surprise this time. But Denmark’s prime minister, Poul Nyrup Rasmussen, had pulled all the stops to win a “Yes” vote. So did the leaders of the main political parties and the commercial community. Nowhere in the post-No-vote commentary can we find the correct explanation: The euro system is flawed, and the people know it. As we have been arguing for 20 years, a common currency could not work effectively unless it were either anchored to gold or the participating nations were to adopt nearly identical systems of taxation. The eurocrats will try to plough ahead with their experiment, without the Danes. Unless the vote is understood and the corrections made, though, there is little chance that Sweden will come aboard and even less that Great Britain will join. The British people are not about to give up sovereignty over their national money in exchange for a floating unit of account whose value is determined on the continent.

Here is how we put it 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.”Notice that in 1992, we still were not talking about how a common EU currency would be managed, only that there had to be a common reference point and that it should include gold. Otherwise, capital flows would slosh around the EU depending upon the currency’s drift toward inflation or deflation. This is what has been happening since the euro was introduced, with the European Central Bank (ECB) trying to combat euro weakness with increases in euro interest rates -- as if a weaker economy would strengthen the currency. They finally arrested the euro’s decline at US$.82 by switching to the more direct method of intervention, draining euro reserves with cooperation by non-euro countries. It now is back at least in the US$.87 range, but as we continue to point out, it will be to no avail if they slip back to interest-rate targets, which require “sterilization” of the interventions -- adding a bucket of liquidity after subtracting a bucket the previous day. The jury still is out on this point.

At least the eurocrats finally are getting around to hearing the advice of Robert Mundell, who was awarded the Nobel Prize in economics last year and was hailed as the godfather of the euro. 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.”

The monetarists and Keynesians are not going to call attention to Mundell’s counsel at this point. The political leadership in Europe, though, has to begin wondering about an experiment that not only seems to have gone awry but also clearly has failed to win the promised popular support. This is why the voters in Denmark played such an important role with their “No” vote. Nobody can accuse the Danes of being isolationist or even non-integrationist. The idea they rejected the euro because they think it will threaten their welfare system or their national culture comes from those who refused to recognize the real flaw, which Mundell should have been spotlighting all along. It is now really up to Mundell and his supply-side supporters in the press corps and in political circles to give him a vote of confidence. How nice it would be if Baker, who took that gold step in 1987 only to see it overwhelmed by pressures to devalue the dollar, were to weigh in. When he was at Treasury under Reagan and Secretary of State under Bush, Robert Zoellick was among his closest aides and in fact drafted JBIII’s 1987 gold speech to the IMF. He is now one of George W. Bush’s closest advisors on international matters, including economics.

Looked at with these considerations in mind, the trial-and-error process in Euroland looks more, not less, promising. Even without the gold anchor, the movement toward the unified currency has had been a marvelous fiscal tonic to the Old World, with political leaders forced to cut tax rates now that they cannot fiddle with currency devaluations. The eurosclerosis that has persisted from the earliest days of the 20th century -- as established elites kept entrepreneurial forces at bay -- can of course be cured. Remember it was Karl Marx who first said that capitalism can survive only with “active, universal suffrage,” with ordinary people having the votes to check the forces determined to preserve the status quo. The people of Denmark deserve a word of praise for the way they voted “No” last week -- not by an overwhelming margin, but perhaps just enough to nudge the politicians into finding the flaw and fixing it.