The Euro Will Lead to a Massive Redistribution of Wealth by Stealth

On 1 January 2002, the single European currency, the euro, will replace national currencies in 12 EU countries. National central banks will effectively hand over control of their assets – government bonds and foreign-exchange reserves – to the European Central Bank, and give people euros in exchange for their national monies. The single European currency is, among other things, a tool of redistribution. It will bring gains to some nations and losses to others. The advantages of the euro are negligible in comparison with the amounts that some nations will lose as a result of the redistribution of assets.

National Currencies Generate Revenue for States

Issuing money is lucrative, since the value of newly printed money far exceeds the costs of producing it – after all, paper and ink are not very expensive. States have therefore monopolised the issue of banknotes. Printing money has become an additional source of public revenue in all countries throughout centuries. Today, monetary creation is typically achieved in the following way. The government issues bonds to cover budget deficits. These bonds are sold to commercial banks and other private sector investors who are attracted by the interest rate and effectively become lenders to the government. The central bank subsequently purchases government bonds from the private sector. By doing this it increases the money supply (its liabilities) and as a counterpart increases its assets (the monetary base). The newly issued money is a form of seigniorage and covers part of public expenditures. In this way, governments usually collect about 1% of GDP, equivalent to approximately 2% of government expenditure. Usually, when the bonds expire, governments issue new bonds to pay off the old bonds. Financing public debt by printing money leads to the growth of the volume of interest-bearing securities held by the central bank and of the money in circulation. If a country carries out its own independent monetary policy, paying the interest on the bonds held by its central bank represents no real burden for the state budget. This is because the central bank’s income derived from the interest-bearing assets is also a source of revenue for the state budget. Not so in the System of European Central Banks. The central banks’ revenue comes from receipt of interest on its assets; an income, which previously went into the state budget and which is going to be redistributed by the European Central Bank. Payment of the interest, however, still has to be made by the state concerned.

The Euro: the Biggest International Transfer in History

With the introduction of the euro, the interest paid by national governments on their debt that their central bank held will be put into a European pot. This debt interest, plus income from all the other assets that their national central banks held, will then be redistributed according to a formula, which will prove beneficial to some states and disadvantageous for others. The shares of different countries in the total income of the European System of Central Banks is defined in the Protocol on the Statute of the European System of Central Banks and the ECB of the Maastricht Treaty: „The sum of the national central banks’ monetary income shall be allocated to the national central banks in proportion to their … shares in the capital of the ECB.“ (Article 32(5)) But the problem is that the share received by each country does not reflect the capital amount that country handed over to the ECB. „Each national central bank shall be assigned a weighting in the key [for subscription to the ECB’s capital] which shall be equal to the sum of 50% of the share of its respective member state in the population of the Community … and 50% of the share of its respective member state in the gross domestic product … of the Community.“ (Article 29(1)) This formula means that some countries will receive a much greater income from the ECB than if they continued to receive income in proportion to the total capital that they put in. The euro will probably be the biggest property transfer in history. If the statistical data does not change dramatically, Germany alone will transfer assets amounting to €163 billion to the ECB, getting back as its share €121 billion, which means it will give up property equalling the annual GDP of Ireland, or four times greater than that of Luxembourg. Germany’s share in the ECB’s monetary income will exceed that of France by a half, while the Bundesbank will give up 3.5 times more assets than the Banque de France. Although the assets will de jure continue to belong to the national banks, all the income derived from them will be assigned to the ECB. This situation is, de facto, the same as if the national banks were to transfer their assets to the ECB. The annual net gain/loss for the national banks will be equal to the calculated capital gain or loss multiplied by the interest rate accrued on the assets. The German exchequer will lose out, as regular interest payments to the ECB will exceed Germany’s share of the ECB’s income. By contrast, the French government will gain. There will be a transition period during which the Governing Council of the ECB may decide that „If [this reallocation] results in significant changes in national central banks’ relative income positions, the amount of income to be allocated pursuant to Article 32 shall be reduced„, but „for not more than five financial years after the start of the third stage.“ (Article 51) After this period, the „significant changes“ will become permanent, and it will be virtually impossible for a member state to leave the system once its assets have been transferred to the ECB.

Table: The Redistribution of Wealth within the European System of Central Banks

Volume of Assets

transferred to the ECB

Population

GDP

Calculated

„capital share“

losses

persons

* National share of ECB monetary income, which equals 50% of the population share plus 50% of the GDP share

Sources: National bank assets, Population and GDP; Hans-Werner Sinn, Holger Feist (1997), Eurowinners and Eurolosers: The

Distribution of Seigniorage Wealth in EMU, CEPR Discussion Paper No 1747, London: Centre for Economic Policy Research.

Political Risks

Despite the magnitude of the figures, there has been no public debate in the European Union on this aspect of the single currency; and European voters are utterly unaware of the problem. This lack of discussion and the remoteness of the decision-making process is pervasive in supra-national legislation. It is a general problem of the European Union. Unjust transfers of money cause conflicts even between family members, let alone non-related nations. What if one day the citizens of Germany ask: „Why should we send substantial subsidies from our taxes every year to another country?“ What if an angry political leader should call the payments to the neighbours unjust and stop them? How will the other states enforce continuation of these payments? The concept of the euro is not only economically dubious, but it is also politically dangerous.