Abstract

Does the euro need a state? Not necessarily. EMU could be built along the lines of a gold standard, where the supply of central bank money by the ECB is inflexible (as a result of a link to gold or a fixed „k-percent-rule" of central bank money expansion); sight deposits in a certain amount are guaranteed by banks' holding of central bank reserves against them in the full amount; all other creditors to banks bear credit risk, and banks are not allowed to lend to governments in excess of regulatory limits to single credit exposures; and there are legally binding insolvency procedures for banks and states.

An EMU of this type would not allow an activist monetary policy to stabilize total demand and, by establishing a hard budget constraint for governments, it would set strict limits to the room for maneuver of fiscal policy. It would be left to governments to create the necessary economic flexibility for their economies to be able to adjust to economic shocks or, if they cannot do this, leave EMU.

It would, of course, be an illusion to believe that the above sketched model for EMU would be implemented. Politics cannot be economically abstinent; it needs meddling with the economy to justify its existence, preferably for the benefit of powerful vested interest groups. Hence, politics wants the euro as state debt money, even if electorates resist a state for the euro. But state debt money without a functioning state is unstable as it opens the door for the abuse of the money printing press. Thus, politics may succeed in keeping the euro, but hardly as a stable currency in the long run.