Tugenden der tschechischen Krone und Laster des Euro

Tugenden der tschechischen Krone und Laster des Euro[1]

Sehr geehrte Damen und Herren, ich freue mich außerordentlich, daß ich zu diesjähriger Seminar des Deutscher Akademischer Austauschdienst eingeladen wurde.

I was asked to give this speech at a Czech university for a German audience in English, which is possibly the most suitable “key signature” for a discussion about the virtues of the Czech crown and the vices of the euro.

Currencies and languages have much in common: both serve for exchange –of ideas, values, between past, present and future. However, nearly every such exchange involves transaction costs. Verbal exchange is costly due to the very subjective perception of the delicate nuances of individual words. Such distinctions have a tendency to lead to misunderstandings, quarrels and conflicts.

Pecuniary exchange is much more straightforward, at least in the perfectly homogenous space within borders - at the territory of one nation respecting the sovereignty of one government. Transaction costs only arise in the event of cross-border trade.

Two traders who speak different languages either need an interpreter, or an agreement to converse in one common business-language. Since the Tower of the Babel narrative there have been on-going efforts to find, discover, or even artificially produce one worldwide language that enables people to “find common speech”. This was the honorary task of Greek in ancient times. The language of Homer was then replaced by Latin in medieval times, and finally by English in the contemporary era. Nevertheless, since the 17^th century there have been repeated attempts to construct one simple international auxiliary language: for example Volapük, Ido, and Esperanto – the best-known. Yet those trials merely ended up as interesting curiosities, kind of little Steckenpferd for a couple of enthusiasts. Today just 0.03% of the world’s population speak Esperanto, whilst about 20% speak English. So while artificial languages (with the honourable exception of IT programming languages) did not solve the confusion of languages, natural selection (albeit somewhat supported by successful conquests’ successes) has lead to the extension of the existing natural language.

The same applies to currencies. From the very beginning of monetary society, there has often been natural competition between different currencies – even within one state. The money of economic powers was subsequently quiet naturally considered the medium of exchange, as respected and recognised international currencies. After pound sterling had reigned, the US dollar’s long and successful epoch began. Since the dawn of the 20^th century, the first dreams of many (or nightmares of others) about supranational currency have come true. John Maynard Keynes raved about the bancor, the International Monetary Fund tried to introduce clearing currency Special drawing rights (SDR). Both ideas floundered without notable success, although the SDR exists as an account unit.

Thirty years ago the Mauerfall opened not only the borders between East and West Berlin and East and West Germany, but also the chance – or malchance – to introduce a new supranational currency – the euro.

Launched in 1999, the euro became a symbol of the perpetual game of chess between economists on one side and politicians on the other. It is not so difficult to guess who moves the white.

It surely corresponds to our Zeitgeist to seek a balance between pros and cons, positive and negative, virtues and vices, exactly in line with the anecdotal claim that even the Devil himself can be appreciated – at least for his devilish effort. Nevertheless, such an approach often results in pure falsehood. Chess is fascinating precisely because it is a game between black and white played on a black-and-white board. If it was a game between greys moving on a grey board, it would be a game of pawns rather than the game of kings. That is why we are not trying to find all the euro’s pros and cons. On the contrary, we will discuss the euro’s main vices in comparison to the Czech crown´s virtues.

There is a well-known catalogue of seven virtues and seven vices based on Aristotle. It names chastity, temperance, charity, diligence, patience, kindness and humility among virtues; and lust, gluttony, greed, sloth, wrath, envy and pride among vices. Let´s go through this ancient list to at least approach the answer to the key question: should the Czech Republic pay for the euro with the crown?

The Czech crown’s first virtue is its chastity. With the exception of the exchange rate interventions that the Czech National Bank performed between November 2013 and April 2017, the Czech currency operates in the floating exchange rate regime. Thanks to this, the Czech crown is neither over- nor undervalued, and it mirrors the reality of the Czech economy quiet well. The euro - in contrast - is not a homogeneous currency at all. Whilst the “Portuguese” and “Greek” euros have purchasing power parity, the euro in Luxembourg is overvalued towards the euro in Lithuania by 99%. Similarly, the euro is too undervalued for Germany and too strong for Baltic countries. Theoretically, there could be “a purchasing power parity union” between the founding states and Austria, or between southern countries. If we sold the Czech crown for the euro, the Czech Republic could join a hypothetical union with Slovakia and the Baltic countries.

As for humility, the Czech crown is protected by the Czech National Bank, which fully respects the Czech constitution and Czech laws. This is a fundamental difference compared to the European Central Bank, which continuously transgresses the Treaty of Lisbon. The so-called Article 125 ‘no bail-out clause’ has been violated by quantitative easing since 2015. When the Federal Constitution Court in Karlsruhe challenged the ECB “in the name of the [German] people”, the European Court of Justice decided – not surprisingly – in favour of the European Central Bank. Such pride in the medium term will be punished by higher and toxic inflation. However, the euro seems to be a currency only living in the Keynesian “short term”.

According to Act No. 6/1993 Coll. on the Czech National Bank, the central bank acts in line with the open market economy. The Czech economy is therefore based on diligence, i.e. continuous effort to reach higher productivity, similar to the Olympic motto “Faster, Higher, Stronger”. On the other hand, the euro area’s philosophy is based on the vice of pure sloth - especially in terms of subsidies. Grants result in a ridiculous waste of public money on incredible projects that have heavy ideological backgrounds. They are liable to corruption, and according to the European Anti-Fraud office are notoriously misused. Former pledges of regional convergence have been long forgotten, and the gap between “rich” and “poor” regions remains wide. Moreover, after Brexit and in the case of the entry of the Balkan states, the Czech Republic will become a “richer” country and reincarnate from net receiver to net payer. 

Another ancient virtue of the Czech crown is its temperance. The Czech economy has been following the prudent finance rules established at the birth of the sovereign Czechoslovak state in 1918. It has never been defeated by public debt, prices have only steadily increased, and interest rates have mirrored the value of money in the Czech Republic. The eurozone, on the other hand, is breaking nearly all the convergence rules set by the Maastricht criteria. Public debt in the eurozone remains at 86% of GDP, while the debt/GDP ratio in the Czech Republic is merely 34%. The chronic gluttony of the euro is also pronounced in terms of the interest rate. According to the Taylor rule, there should be a significant difference between the interest rates in Greece (about –3%) and Germany (nearly +5%). Instead, the European Central Bank set a uniform negative interest rate for all 19 member countries. While Czech interest rates have increased from 0.05% during the crisis period to a recent 2%, the ECB rates have decreased from 0% in 2011 to a recent –0.5%.

Moreover, these negative rates fuel greed in kind. Low rates are connected to low revenues, which compels investors to seek other attractive investments. The obvious winner was the real estate sector, which led to the mortgage boom that became the boom of non-performing loans. To tame the credit boom, macroprudential policy was developed. Even wider scissors between the poor (who can hardly afford to rent a flat) and the rich (who are buying second and third flats as an investment) then results in the malignant vice of envy. It is envy which returns Europe to a time and place before the Iron Curtain, to attempts of the new expropriation as seen in Berlin, or as suggested by the former Greece Minister of Finance Yanis Varoufakis.

Clearly, the euro currency has one attractive virtue: low transaction costs. Global corporations that operate in the Czech Republic would clearly prefer the euro to the crown, as they suffer from securitisation swaps. Nevertheless, this is the only advantage that can be discovered in the deep darkness of the common European currency.

Well, the economists have played their part. The next chess move is the politicians’. They keep saying that we should sell the Czech crown and buy the euro just because of the great expectation of “elite club membership”. First of all, I’m uncertain whether the eurozone really is a elite club. Not yet and not now. As Milton Friedman said in 1997:

“A common currency is an excellent monetary arrangement under some circumstances, and a poor monetary arrangement under others.”

It is just a pity that in the two decades of the euro’s ephemeral life, the circumstances were hardly ever “excellent”.

Furthermore, the Czech Republic would not win “gold membership” at all. As the simple cluster analysis clearly shows, the eurozone is divided into two parts: a core and periphery. The South matches the former Latin Monetary Union, which was established in 1865 between France, Belgium and Italy. Portugal and Spain joined in 1869, Greece in 1877, and was a picture of monetary groping and stumbling. In contrast the North corresponds to member states of the Vienna Monetary Convention of 1857, which was concluded by the German Customs Union and Austria-Hungary (including today's Austria, Hungary, Slovakia and Slovenia). The third cluster would consist of the three Baltic countries. As the math model clearly shows, the Czech Republic would not connect to the bright strong North, nor to the shaking South…but only to the Baltic East.

This year we celebrate the 100th anniversary of the Czech crown, and commemorate 20 years of the euro. Marcus Tullius Cicero wrote in his opus de Officiis:

„Est igitur adulescentis maiores naru vereri
– It is the duty of the young to show reverence to his elders.“

I would therefore like the young, inexperienced euro currency to pay homage to the sound and successful Czech crown. I do hope, from the bottom of my heart, that we retain the Czech crown with all its virtues in order to repel the vices of the euro tinsel.

Ladies and gentlemen, this brings me to the end of my contribution. There is one virtue we did not mention: patience. As I had the pleasure to be here in one room with such a virtuous audience, I would like to thank you for your attendance and also your patience. If you have any answers, I look forward to answering them right now.

FF UK Prague, 21 September, 2019