A couple interesting pieces in yesterday’s Financial Times, related to last year’s debates about the role of the ECB in the European crisis.
First, this article on proposals to scrap higher-denomination bills (to combat money laundering) notes in passing that “the Central Bank of Luxembourg is a particularly prolific producer of high-denomination notes … Luxembourg issued notes equivalent to 194 percent of its GDP in 2013, compare with 16 percent in Germany, 9 percent in Italy and 4 percent in France.” This is a nice reminder that the printing of banknotes is not centralized in Europe, but — like almost all the day-to-day activity of central banking — remains the responsibility of the various central banks, with little oversight from the center. This little story is also a reminder of how — as I’ve pointed out before — the eurosystem is not like the gold standard. The exceptionally large cash issues in Luxembourg are an issue for law enforcement or financial regulators, but they are not a macroeconomic issue. No one suggests that large cash issues could ever cause the Bank of Luxembourg to exhaust its reserves, in the way that equivalent “internal drains” occasionally threatened the Bank of England in the 19th century. I wish in retrospect than I’d written something during the Greek crisis mentioning that physical euros are in fact already printed in Greece. Not that I think this operational detail is very important in itself, but it crystallizes the continued role, (and potential autonomy) of the national central banks in a way that more abstract arguments don’t.
Second, on the op-ed page there is Wolfgang Munchau suggesting that one of the main reasons for the revival of the German economy in the early years of Nazi rule was the accomodative policy followed by Hjalmar Schacht at the Reichbank, which included not only conventional expansionary policy — enabled by effective exit from the gold standard — but “unilateral restructuring of private debt owed by German companies to foreigners.” (Schacht’s memoir My First 76 Years is fascinating reading.) The recovery of output and employment in Germany ahead of the rest of Western Europe, Munchau writes, was “one reason for Hitler’s initial popularity,” and, more to the point, is evidence for “what an unorthodox central banker can do if he or she has the political support to break with the prevailing orthodoxy.” The relevance for today is obvious:
The current policy orthodoxy in Brussels and Frankfurt, which is shared across northern Europe, has some parallels to the deflationary mindset that prevailed in the 1930s. Today’s politicians and central bankers are fixated with fiscal targets and debt reduction. As in the early 1930s, policy orthodoxy has pathological qualities. Whenever they run out of things to say, today’s central bankers refer to “structural reforms”, although they never say what precisely such reforms would achieve.
In principle, the eurozone’s economic problems are not hard to solve: the European Central Bank could hand each citizen a cheque for €10,000. The inflation problem would be solved within days. Or the ECB could issue its own IOUs — which is what Schacht did. Or else the EU could issue debt and the ECB would buy it up. There are lots of ways to print money. They are all magnificent — and illegal.
There are no Nazi parties in the eurozone today, except in Greece. But France and Italy have populist parties on the right that are clearly outside the current policy consensus. Imagine a scenario in which Beppe Grillo, leader of Italy’s Five Star Movement, were to win the Italian election in 2018.
The term of Ignazio Visco, governor or the Bank of Italy, expires in November that year. Mr Grillo would be in a position to appoint his own central banker. Perhaps he would choose someone as resourceful and ruthless as Schacht and able to plot Italy’s way out of the euro, via a parallel currency regime for a transitional period, defaulting on foreign debt in the process. The devaluation and the increase in public sector investment which would be possible under a new regime could bring instant economic growth.
This is interesting, for a couple of reasons. First, the assumption, which Munchau doesn’t feel he needs to defend or even state explicitly, that any elected European government can appoint its own central bank leadership, without the approval of the ECB. (My understanding is that this is indeed the case, though the relevant national laws all include sweeping but presumably unenforceable language that once appointed the central bank leadership is not to take any outside direction.) Also worth noting, the suggestion of a temporary parallel currency, consistent with my idea that exit from the euro would not have to be an all-or-nothing leap, but involves passing through an extended gray area.
The second interesting thing is Munchau’s evident ambivalence. On the one hand, he sees the parallels between today’s the orthodoxy of the euro today and of the gold standard before World War II.  He recognizes the problems with postulating objective constraints on central banks in a depressed economy. He realizes that the current austerity regime shows no signs of delivering material benefits to the great majority of Europeans. And against this … what? “I have no doubt that any populist government in Europe would end in disaster,” he writes, but the basis of this certainty is not explained.
For myself, I have no doubt that the European crisis is not over. At some point, maybe soon, another European government is going to come up hard against the limits of acceptable policy in the Brussels-Frankfurt orthodoxy. I still think the national central banks will be the commanding heights in the ensuing battle.
 To be clear: I don’t think there is a close parallel in the way the two systems actually operate, but in their ideology, yes.