To: Poul Nyrup Rasmussen, Prime Minister, Denmark

From: Jude Wanniski

Re: Voting down the Euro

Yes, you did everything you could to persuade your citizens to vote
“Yes” on the referendum last week to join the others in the European
Union in a common currency, the euro. The fact that they instead voted
down the idea, by 53 percent to 47 percent, of course, disheartened you,
but I think you should be proud of your people for resisting all the
pleas made to them. The post mortems indicate they voted “No” by that
narrow margin because they somehow see the euro as a threat to their
social programs or a diminution of Danish culture with the passing of an
independent currency, your krona. Instead, they wisely understand,
perhaps not individually, but in the aggregate, that the design of the
euro is flawed and must be fixed before the experiment can develop

In 1992, when the people of Denmark voted down the Maastricht Treaty,
which encompassed the design of the common currency, they shocked the
eurocrats who took popular support for granted. The eurocrats could not
imagine the Treaty was rejected because the design of the monetary
system was flawed, since they had designed it and assumed it was as
good as it gets
. You yourself, Mr. Prime Minister, must acknowledge
that something in the euro must be flawed when it is born at a healthy
rate of $1.17 in equivalent U.S. dollars and has now shriveled to $.87,
having gone as low as $.83 recently. Why should the people of Denmark
use as their national money a floating euro managed by the same flawed
eurocrats who designed it? They might as well stick with their own
independent central bank, giving up the clear efficiency
advantages of a common currency rather than also having to give up
the power to defend itself against the potential errors of the

This is not a new idea for me, Mr. Prime Minister. As one of the
original supply-side political economists in the world and a
follower of the Canadian Robert Mundell who last year was given the
Nobel Prize in economics for having originally conceived of the
euro in the early 1960s, I have been arguing for 20 years that it is
hopeless to imagine you could think of stitching together 11 different
floating pieces of paper into one, and have it work much better than the
11 floating independently. Prof. Mundell has argued consistently that
such a “system” is a “non-system,” unless there is some mechanism by
which the eurocrats of the European Central Bank can decide day by day
if too many or too few euros are in the system. His answer has always
been to bring gold — the most monetary of all commodities — into the
mechanism as a way of making the euro stable over a long stretch of

Here is how I put it to my Wall Street clients 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.

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.”

In other words, Mr. Prime Minister, the people of Denmark will
continue to resist the euro at every opportunity, until the euro is
defined in terms of gold. That will take the power to manipulate its
value out of the hands of the eurocrats and keep it in the hands of the
people in the marketplace. Three cheers for the people of Denmark!

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