Ridding Europe of the Hated Deutschmark

Governments of Latin countries, and especially France, regarded the Euro as an efficient means of getting rid of the hated Deutschmark. Before the introduction of the Euro, the Deutschmark was a standard that laid bare the monetary mismanagement of irresponsible governments. While the Bundesbank inflated the money supply, it produced new money at a slower rate than the high inflation of—especially Southern European—countries, who used their central banks most generously to finance deficits. The exchange rate against the Deutschmark served citizens in those countries as a standard of comparison. Governments of high inflation countries feared the comparison with the Bundesbank. The Euro was a means to end the embarrassing comparisons and devaluations.

Governments of high inflation countries did not fear the newly established European Central Bank. While the new central bank would look like a copy of the Bundesbank from the outside, from the inside it could be put under political pressure and gradually become a central bank more like that of Latin central banks. Actually, Southern Europe has control over the ECB. The council of the ECB is composed of the directors of the ECB and the presidents of the national central banks. All have the same vote. Germany and Northern, hard currency countries such as the Netherlands, Luxembourg and Belgium hold the minority of votes against countries like Italy, Portugal, Greece, Spain, and France, whose governments are less averse to deficits. These Latin countries had strong labor unions and high debts making them inherently prone to inflation.

--Philipp Bagus, The Tragedy of the Euro, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2012), 43-44.