The Tragedy of the Euro: When Money Puts Savings at Risk

The euro was presented to citizens as a guarantee of stability and prosperity. It was intended to bring Europe closer together economically, facilitate trade and create a stable currency modelled on the Deutsche Mark. Yet the institutional design of the euro contains incentives that can produce exactly the opposite effect over the long term: they can undermine the value of money and, with it, the savings of citizens.

The fundamental problem lies in the particular structure of the European Monetary Union. In a nation state, monetary and fiscal policy at least operate institutionally within the same political framework. In the eurozone, by contrast, monetary policy is shared, while fiscal policy remains largely the responsibility of the individual member states.

This creates a classic tragedy of the commons. One can imagine a school of fish in international waters that several fishermen are free to access. Each individual fisherman has an incentive to catch as many fish as possible. He receives the benefit of the additional catch himself, while the cost of overfishing – the shrinking fish stock – is borne collectively by all fishermen. Precisely because the resource is available to everyone, each individual has an incentive to exploit it as quickly and intensively as possible.

A similar mechanism exists within the European Monetary Union. The commonly used resource is the purchasing power of the euro. Member state governments can increase public spending through deficits and thereby obtain additional resources. The immediate benefits of this spending accrue mainly to the respective government and to recipients of public expenditure within that country. Part of the cost, however, can be externalised to other users of the euro.

This occurs in particular when additional government debt is financed through the banking system and the European Central Bank supports government financing conditions through its monetary policy. The resulting expansion of money and credit can reduce the purchasing power of the euro. The costs of additional public spending are therefore not borne exclusively by the citizens of the deficit country. Through the shared currency area, they are partly distributed across all holders of euros, including those living in other member states.

This creates a problematic incentive for governments: the political benefits of additional public spending are concentrated largely within their own country, while part of the monetary costs can be shifted onto euro users elsewhere. Just as each fisherman has an incentive to catch one more fish, each government has an incentive to run additional deficits as long as it can expect part of the resulting costs to be borne by the currency union as a whole.

The common resource being exploited is therefore ultimately the purchasing power of the shared currency. The more individual states attempt to use this resource for their own political purposes through deficit spending, the greater the pressure on the stability of the euro system becomes. The tragedy lies in the fact that behaviour which may appear rational from the perspective of an individual government in the short term can, in aggregate, weaken the common currency and endanger the savings of all euro holders.

The sovereign debt crisis made this problem highly visible. When individual member states encountered difficulties financing their debt, European institutions faced a dilemma. A consistent application of market principles would have meant that creditors bear losses and that states, in extreme cases, could become insolvent. Instead, the view increasingly prevailed that the stability of the euro system had to be preserved at almost any cost.

This also changed the role of the European Central Bank. The ECB increasingly became the decisive stabilising institution of the monetary union. Bond purchases, extremely low interest rates and a massive expansion of the central bank balance sheet became instruments used not only to pursue monetary policy objectives, but also indirectly to stabilise the financing conditions of highly indebted states.

For savers, this development has far-reaching consequences.

Money is not only a medium of exchange. It is also a means of transferring purchasing power into the future. Anyone who saves gives up consumption today in order to consume tomorrow. A stable currency protects this intertemporal transfer of purchasing power. If money continuously loses value, however, savers are gradually deprived of purchasing power.

Inflation acts like a barely visible tax. The nominal amount in a bank account may remain unchanged or even increase through interest. What matters, however, is not the number shown on the account, but what it can actually buy. If prices rise faster than the return on savings, their real purchasing power declines.

This is where the tragedy of the euro becomes particularly apparent. The political and institutional logic of the monetary union creates persistent pressure towards expansionary monetary policy. High levels of government debt make rising interest rates politically and fiscally costly. At the same time, economic and financial crises can repeatedly be used to justify further central bank intervention. Yesterday’s exceptional measure can easily become tomorrow’s normal instrument.

For long-term savers, this raises a fundamental question: how can wealth be protected against the risks of a politically managed monetary system?

Gold and silver offer a historically proven answer. Unlike the euro, precious metals cannot be created by a decision of a central bank. Their supply cannot be expanded at will in order to stabilise government finances or support financial markets. They have no issuer whose ability to pay determines their value.

This does not mean that the prices of gold or silver cannot fluctuate. Rather, it means that physical precious metals exist outside the system of credit promises and politically managed money creation. This is precisely where their particular role in wealth protection lies.

The true tragedy of the euro therefore lies not only in the possibility of future currency crises. It is already visible in the gradual change in our understanding of money and saving. In a sound monetary system, thrift is rewarded and forms the basis for capital formation and prosperity. In an inflationary monetary system, by contrast, savers are forced to take ever greater risks simply to preserve the purchasing power of their wealth.

Anyone who wants to preserve wealth over the long term should therefore not rely solely on political institutions to protect the value of money. True financial provision begins with recognising that money itself can be a risk.