 Nikolai Gerchev will present the F.A. Hayek Memorial Lecture sponsored by Toby Bexendale. I am especially proud to note that Nikolai was a Rowley Summer Fellow at the Mises Institute in 2002 and 2003. He earned his Ph.D. in Economics from the University of Paris in November 2006. Nikolai has published articles on monetary institutions and general economic theory in the quarterly Journal of Economics of Austrian Economics, the Journal of Libertarian Studies and Libertarian Papers. He has contributed essays to books celebrating Hans Hoppe's work and the centennial of Mises's Theory of Money and Credit. The latter work and actually a book by Hans Hoppe, a recent book by Hans Hoppe, they are on sale at our bookstore. The latter work on Mises's Theory of Money and Credit is entitled The Theory of Money and Fiduciary Media and it was edited by Guido Hulsmann. Currently, Nikolai works as an economic analyst for the European Commission in Brussels, an international public organization associated with the European Union. So I welcome Nikolai. Hello everybody. It is a great pleasure for me to be back at the Mises Institute, which I must thank first for having given me the opportunity some 11 years ago to finally start my economic education after having earned a master's degree in economics from a very reputable French university. And I must now thank the Institute a second time for this great honor to present the 2013 Memorial Hayek Lecture. Hayek is not the Austrian economist par excellence. A number of richly documented scholarly articles have demonstrated that with respect to a few critical issues, Hayek's economic and social thought is not fully reconcilable, not to say contradictory, with the praxeological method or libertarian ethics. It is very moment, however, this impurity of Hayek is of great relief to me and a secondary reason for renewed sympathy for the man. After all, an Austrian economist who is currently employed by the closest European equivalent of the International Monetary Fund hardly qualifies either as an Austrian lecturer par excellence. The primary reason for my appreciation for Hayek, though, comes from his early, very valuable contribution to monetary theory. In the first part of this lecture, I would like to briefly present Hayek's thinking and main conclusions on what he called monetary nationalism. Then I will attempt to expand this approach in order to show how monetary nationalism leads to monetary imperialism. And finally, within this analytical context, I will appraise the recent increase in cooperation between governments, as observed since the policy response to the banking and public finances crisis in Europe. In a series of five lectures delivered in 1937 and published under the title Monetary Nationalism and International Stability, Hayek offers an in-depth analysis of the main deficiencies of the present-day monetary system. In a nutshell, he identifies two factors that disrupt international economic relations. The fractional reserve commercial banks on the one hand, and the national central banks on the other hand. The instability generated by the fractional reserve banking system, or a banking system working on the proportional reserve principle, as Hayek puts it, is rooted in the fact that a relative change in the demand for different types of media of exchange results in a nominal change in the aggregate overall supply of money. For instance, a decline in the aggregate demand for cash is followed by an increase in the supply of bank credit and bank-created fiduciary media. Indeed, because banks keep fractional reserves only, the lower demand for cash, when offset by an equally higher demand to hold deposits, creates extra liquidity for the banks. And this extra liquidity serves then as a foundation for a bank credit expansion that is much larger in size. In Hayek's own words, quote, the most pernicious feature of our present system is that the movement towards more liquid types of money causes an actual decrease in the total supply of money and vice versa, end of quote. Hayek is interested, above all, in the implications of the fractional reserve principle for the process of economic adjustment to relative changes in international demand. At the international level, this pernicious feature implies that gold movements between countries lead to an over-proportional contraction of bank credit in the gold-exporting country, while credit and money expand over-proportionally in the gold-importing country. Hayek emphasizes that under purely metallic currency, and by this he means 100% commodity standard, there would be no systematic relation between an outflow of money and the level of interest rates. However, the situation is altogether different in that mixed metallic standard, where banking is organized along national lines according to the principle of national proportional reserves. The outflow of money, because it contracts credit at home and expands credit and money abroad, does imply an increase of the domestic interest rate beyond its natural level and a decline in the interest rate abroad. Interest rates then become disconnected from the social time preference and propagate malinvestments. Now, on the ground of this central finding, Hayek concludes that a crucial ingredient for international monetary stability is to reform banking in line with the 100% reserve principle. As a consequence, the solution to current monetary problems would be rooted in a far-reaching reform of the banking sector itself. It seems to follow from all this that the problem with which we are concerned is not so much a problem of currency reform in the narrower sense as a problem of banking reform in general. In addition to his explicit support for the 100% reserve banking, Hayek elaborates on the cured critique of central banking. His analysis of national monetary policies debunks the alleged benefits of what he calls monetary nationalism, namely the doctrine according to which the aggregate money supply on the territory of the nation should not be determined in line with the market forces that govern the flows of money among the different regions of that same nation. To put it simply, this corresponds to the case of independent national currencies, which are produced under the privileged control of independent central banks. In such a system, the adjustment process to relative changes in international demand is meant to take place through alterations of the value of the currencies and not through actual money transfers. Hayek demonstrates that such a purely monetary adjustment, far from bringing about the necessary real changes, is actually introducing new disturbing factors. Alterations in the currency exchange rates put in motion a redistribution of income among all industries, including those for which demand has not moved. Distribution is not sustainable in the sense that it is inconsistent with the new consumer preferences. Imagine that the international demand is shifting away from some national sector. Under homogeneous monetary standard, the redirection of the monetary flows brings in itself a change in relative income and profits, which then redirect the factors of production so that the new production structure becomes consistent with the new consumption pattern. This natural equilibrating force is not available in the case of multiple and independent paper currencies. Here, the uniform depreciation of the currency does not trigger the required real adjustment in relative prices, which alone would reflect the new demand structure. Rather, the monetary adjustment creates a generally inflationary environment in which the adjustment process is engineered by an increase in the prices and incomes in all other sectors. Hayek emphasizes, quote, that the final positions of the individuals will not be the same as that which would have been reached if exchanges had been kept fixed, because in the course of the different process of transition, all sorts of individual profits and losses will have been made, which will affect that final position, end of quote. The inflationary impact of the depreciation brings about a purely monetary that is ultimately self-reversing disturbance, because it causes a temporary boom in some sectors. The boom, however, is clearly unsustainable, as the eventual rise in costs will reveal that there are no real funds to finance the expansion of the production. In these lectures, Hayek does not detail the operation of the trade cycle. Nevertheless, he still makes it clear that the inflationary policy of the central bank leads to investment decisions that ultimately will have to be reversed. Whatever its other alleged benefits, monetary nationalism will always disturb the economy because of the boom-bust cycle that it creates. Hayek also adamantly explains the fallacy behind that other most celebrated benefit of inflation, namely to allow economic adjustment in the event of rigid wages or, alternatively, to avoid the need for painful cuts in nominal wages. Nowadays, this is still an often referred to argument in favor of recovering competitiveness by means of an external devaluation, when internal devaluation, that is, by the price mechanism, is considered either politically unacceptable or simply impracticable. Here again, Hayek emphasizes that inflation is in no way a substitute for the natural decline in the wage of that specific type of labor, which faces a negative demand shock relative to all other types of labor. It engineers a generalized decline in all real wages, which cannot restore equilibrium in the relative cost structure. Moreover, the decline in real wages might be expected to be short-lived, as wage earners will be quick to learn the negative impact of inflation on their real incomes and will require an adjustment. In anticipation of the rational expectations, Hayek clearly states that it will soon prove illusory that it is easier to depreciate wages by creating inflation rather than to allow specific nominal wages to go down. Furthermore, Hayek argues convincingly that a system of independent central banks suffers from an inbuilt inflationary bias. First, if the central bank adopts the policy to stabilize the international revenue, group pressures will prevent it from engineering a deflation when a deflation would be needed in order to offset an increase in the international demand for the products of some industries. For all practical purposes, a stabilization policy would be followed in one direction only, and most notably in the countries where prices tend to fall lowest, relatively to the rest of the world. In this sense, quote, the possibilities of inflation, which this offers if the world is split up into a sufficient number of very small separate currency areas, seem indeed very considerable, end of quote. Second, Hayek points out that whatever the specific policy the central bank chooses to follow, it will always act as a lender of last resort. This empowers the central bank to refinance any bank in the event of a bank run. In full knowledge of this, commercial banks lend less prudently and expand their balance sheets beyond natural limits. In a sense, central banks lose the full control of the money supply and are bound to accommodate an inflationary boom started by the banks. So Hayek identifies the moral hazard problem related to central banking very early and stresses that the control of the money supply is, quote, the fundamental dilemma of all central banking policy. And he further stresses that the only means to restrain banks' credit expansion would be to credibly commit not to act as a lender of last resort. Such a commitment, however, would be clearly contradictory with the very idea of independent national currencies and central banks. And this is how Hayek completes his full argument about the impracticability and instability generated by monetary nationalism. To sum up, Hayek's early monetary thought reached two main conclusions. First, a system of multiple national central banks, which all act as lenders of last resort for the domestic financial sectors, is inherently inflationary. Second, such a system is marked by a high degree of economic instability as the generalized inflation prevents the necessary real adjustment and introduces monetary disturbances of their own. In what follows, I would like to develop Hayek's first conclusion by further exploring the inner tendencies of a system of multiple central banks. The distinctive feature of modern central banks is their political and privileged position within the economy. Indeed, the very framework in which paper monies are produced and introduced into circulation is fundamentally different from the framework of commodity monies. Commodity monies which evolve out of the direct voluntary exchanges are subject to the rules of both horizontal and vertical competition. On the one hand, different commodities can be competing on the market for fulfilling simultaneously the function of a medium of exchange. Additionally, various producers of the same commodity can be competing for offering certification services with regards to the specific monetary objects in the economy. On the other hand, and much more importantly, the producers of any of the commodities which serve as a medium of exchange must compete in the context of generalized scarcity with the producers of any other good. This implies that on the market, an expansion of the money supply is costly as factors of production must be bid up from other sectors. Thus, the price mechanism through its influence on the expected relative profitability of any business venture naturally regulates the quantity of money in the economy. This natural regulation of both the production and the purchasing power of commodity monies also ensures that those who venture into supplying media of exchange do not benefit from a privileged position. Their income and wealth are positively affected if the demand for money rises relative to other commodities including other media of exchange. Inversely, a negative income effect occurs if competition intensifies or demand declines. Competitive money producers must cope with the uncertainty related to the management of private property and could occasionally be driven out of business exactly as any other capitalist entrepreneurs. Most significantly, the fact that they supply the economy with the medium of exchange or one of the media of exchange does not confer on them any special status that would allow them to claim more of the aggregate output of the economy than what they earn on the market. That is what other property owners transfer voluntarily to them. Things are altogether different with paper monies. To begin with, it should be emphasized that the acceptability of paper monies in the daily exchanges is rooted exclusively in the government sphere. Given that they have no non-monetary utility and therefore no alternative source of valuation, the foundation for ever accepting to hold paper monies that is to be certain that they will be accepted in return by other individuals in the economy ultimately comes from the legal certainty that any attempted rejection will be defeated by government intervention. Paper monies owe their existence to legal tender regulations enforced by coercive states. This economic fact is important as it underlines that states and paper monies share a common essential feature, namely their coercive nature. One implication of this political nature of paper monies is that their production and supply escape the discipline imposed by the market. Competition-driven cost considerations and consumer-determined return expectations are absent from the calculus of paper money producers. Indeed, the cost of producing one or 10 units of a given paper money are all identical, which implies that the marginal cost of increasing the money supply is zero. This grounds a very special privilege to any paper money producer, namely the capacity to acquire for free goods and services already produced by others. To borrow Rothbard's expression, a paper money producer could consume without producing and thus seize the output of the economy from the genuine producers. End of quote. The supply of paper money is then involved in nothing else but the special kind of exploitation, which could be labeled monetary exploitation to be distinguished from exploitation by means of taxation or direct regulation of the economic activity. This makes it clear why paper money production is always legalized, protected, and de facto controlled by the states, which do not admit of any rivalry in the exercise of their local monopoly of expropriation. Given the lack of any nature that is market-driven check on the quantity of paper money is produced, the question of the limits on their supply is of particular interest. As a matter of fact, this is a problem with which money producers themselves have been confronted. How should monetary policy be conducted? Much, if not all, of the mainstream monetary research of the past century can be seen as an attempt to provide an answer to that apparently simple question. However, the large variety of mainstream practical advice has left untouched the core of the problem. The problem itself is not a trivial one, especially in the light of not infrequent cases of hyperinflation. A hyperinflation develops when expectations for a continual loss of purchasing power lead to a significant drop in the demand to hold money. Such expectations arise when monetary prices have been increasing already for a significant time span, which in itself is the result of major increases in the money supply. The typical central bank response is to further increase the money supply in order to address an alleged shortage of money. This, of course, only feeds the inflationary expectations. The end result of this vicious circle is a galloping increase in prices and a deteriorating capacity for money to intermediate exchanges. Money users might then turn spontaneously to an alternative media of exchange, produced either by the market or by another central bank. From the outset, this would suggest that a paper money producer faces no strict quantitative limit, save for the extreme risk of eviction by a foreign rival. However, this risk is crucial from the point of view of the state, as it implies a significant loss in its exploitation capability. It also highlights an important limiting factor, namely the very existence of and rivalry between other paper money producers. The extreme case of hyperinflation also makes it clear that the paper money producer, despite all legal tender legislation, ultimately relies on the individual's consent to continue to accept its product. This consent, which must be renewed time and again, is always relative to the quality of services rendered by rival monies. Indeed, any state which alone intensifies monetary exploitation faces either a gradual depreciation or a sudden devaluation of its currency relative to other currencies. This very fact limits its capacity to further increase the money supply through two channels. First, the loss of purchasing power means that a stronger increase in the supply of money would be needed in order to yield the same expropriation effect. Second, the public consent is seriously endangered, which could lead to a further depreciation of the currency. It is clear that the obstacle in front of a single state to expand its monetary exploitation is the very existence of multiple paper money producers. The solution to this conflict situation is to deprive rivals of their capacity to act independently. This does not only help the state to increase monetary exploitation internally. It also allows it to grow externally and to enlarge the territory that it dominates. This tendency to expand monetary exploitation above its internal limits and beyond the current political boundaries is best characterized by the notion of monetary imperialism. And this is a concept which I am borrowing from Professor Hoppe, who first introduced it in Austrian analysis. The concept of imperialism is fully justified as the conflict situation persists and the tendency to expand does not vanish so long as the last rival has not been deprived of the independent control of its money supply. Monetary imperialism is in the very nature of paper monies and can be seen as a specific expression of the general conflict between rival states, in particular with regards to money production. As long as there are multiple paper money producers, the policy of monetary imperialism will then not be avoided. Moreover, its expansion is guaranteed by the fractional reserve banking system itself. Because they are regularly weakened by the bust phase of the economic cycles they themselves create, the inherently bankrupt fractional reserve banks drag the domestic state into bailing them out, thereby significantly endangering its financial condition and capacity to act independently. It follows that at any given moment, some paper money producers are weaker financially than others. According to a generalized progression theorem formulated by Professor Huseman, political centralization and ultimate unification are in the interest of both the financially strong and the financially weak political entities. Hence, the very same weaknesses of fractional reserve banks that bring national central banks into existence also make sure that the centralization process is fully completed internationally. Commercial bankers might even actively promote submission to a stronger foreign money producer, given that they critically depend on the reliability of a strong lender of last resort. We could distinguish two general forms of monetary imperialism, unification and cooperation. Unification results in the effective reduction of the number of paper money producers. Monetary cooperation is a less intuitive and more subtle case of imperialism as the number of paper money producers is not reduced, even though they act for all relevant purposes as one. This broad classification offers a reinterpretation of the present-day monetary arrangements. There are three distinct institutions that bring about monetary unification, in which case the dominant central bank expands the territory on which it controls the money supply. These institutions are dollarization, the currency bought, and the monetary union. Dollarization occurs in cases of hyperinflation when people spontaneously quit the domestic money and begin to use a foreign paper money of relatively better quality. The domestic money producer is evicted while the foreign central bank gains an extension to its territorial monopoly. Cases of official dollarization have also occurred recently. An official agreement allows the otherwise evicted central bank to keep some form of existence, and maybe even to get back a portion of the sceneryage it used to earn. The most prominent current examples of dollarization include Uruguay, Nicaragua, Kosovo, Montenegro, and more recently Zimbabwe. The currency bought addresses the issue of sharing sceneryage, so to speak, by design. The setup of a currency bought always proceeds from an official agreement by virtue of which the domestic central bank declares that it will produce cash bank notes and replenish domestic banks accounts that is produced the base money in the economy, exclusively in exchange of the foreign reserve currency according to a prefixed conversion rate. From an economic point of view, the domestic currency is no longer money per se, but a simple money substitute redeemable in the foreign money. Hence, a currency board effectively transfers the monopoly of money production to the foreign central bank. Its own specificity lies in the fact that the evicted central bank keeps its physical existence while its economic nature is transformed from a money producer into a deposit bank. Real world examples of currency boards, such as those in Hong Kong, Lithuania, Estonia until recently, and Bulgaria still, have all operated on the fractional reserve principle. This means that only a portion of the foreign currency received has been effectively kept in reserves as such. The vast majority has always been invested in interest-yielding securities denominated in the foreign currency. The yield on these securities has functioned as a partial compensation for the last scenario that the currency board used to earn in its previous quality of a central bank. This also explains why a central bank would prefer transforming itself into a currency board rather than accepting a dollarization even if it is an official one. The third form of monetary unification, namely the setup of a monetary union, is not much different in essence. Should the single money of the union be already produced by one of the member states, then the union, the setup of the union, is equivalent to official simultaneous and multiple dollarizations. If a new paper money is introduced, then the setup of the union must undergo an initial stage where the member states pack their currencies to the new money to be issued by a new central bank. In a sense, the new paper money, which lacks a history of prices, must be borne as a money substitute, initially produced by a de facto currency board. The next stage consists in interchanging the nature of the monetary objects, whereby the money substitute becomes money and vice-versa. In the final stage, the money substitutes, that is the previous paper monies, disappear physically. And the different steps of the European Monetary Union until the eventual physical introduction of the euro in January 2002, perfectly fit into this sequence. And currently, both the East African community and the Gulf Cooperation Council countries are contemplating, completing their plans for establishing monetary unions. Because monetary unions reduce the number of rival paper money producers, they allow for an increase in monetary exploitation. The expected end result is higher inflation than otherwise and a strengthened tendency towards further monetary centralization. They also facilitate the less straightforward form of monetary imperialism, namely the intergovernment and inter-central bank cooperation. By coordinating their policy actions, that is by increasing monetary exploitation together, paper money producers eliminate the disturbing divergent developments in the currency's purchasing powers. Thus, users' consent is better secured as no viable alternative is left. The permanent risk of bankruptcy of fractional reserve banks encourages cooperation between paper money producers, also on an ongoing base. Assume that the central bank decided to remain conservative and not to expand the money supply together with the other central banks. Its money would then appreciate, relative to the other currencies, and will keep appreciating so long as users expect the conservative central bank to keep its policy. Because its money keeps purchasing power better, its international demand would increase, which would result into higher inflows of deposits at the commercial banks. Paradoxically enough, the conservative central bank loses its capacity to control domestic banks' liquidity. Furthermore, a sudden change in users' expectations could reverse the international flows of deposits and cause the illiquidity of the commercial banks, especially if they have used the deposit inflows for credit expansion at home or abroad. The attempts of the central bank to recover control over the liquidity of the banks, for instance by means of sterilization policy, de facto would also imply that a foreign-induced monetary policy has to be followed. The extreme instrument for insulating the national banking sector from this phenomenon of hot money would be to abandon the conservative policy early enough, that is to accept monetary cooperation. A recent case in point is a decision of the Swiss national bank to not to let the Swiss franc appreciate below one franc and 20 cents for a euro since July 2011. From the point of view of the more expansionist central banks, it is also in their own interest to cooperate even exposed, that is to provide support to foreign central and commercial banks in difficulty. A severe banking crisis in one country could undermine the stability of fractional reserve banks elsewhere. Not only because banks' balance sheets are interlinked through the international interbank market, but also due to the very low degree of divisibility of confidence in banking. Despite their inherent rivalry, paper money producers do share a common interest, namely the avoidance of bank runs. Good real world examples of exposed monetary cooperation are the coordinated policy decisions between the five major central banks since 2008, and in particular, the US dollar euro swaps which were meant to provide dollar liquidity to illiquid European banks. Monetary cooperation is an instance of the general intergovernment cooperation which can also take the form of direct financial assistance through intergovernment loans. I would like to spend the remaining of my lecture precisely on an economic analysis of these official loans which have become lately very prominent in Europe. The structural weaknesses of the fractional reserve banks lead to often unforeseen bailouts, the magnitude of which is unknown upfront and results in sizable budgetary deficits as well as in an increase in the implicit government liabilities. This puts governments in a difficult financial situation due to ever-increasing funding costs. Beyond the point, the cost becomes so high that governments decide to stop issuing new securities and to look for an alternative funding option. Such an alternative is offered by the so-called official international assistance which is typically dispensed either bilaterally or most often by the International Monetary Fund. The outburst of the public finances crisis in the European Union has led to a wave of unprecedented intergovernment solidarity that brought about a number of specific and dynamically evolving instruments for granting aid to fellow members of the Union. The latest of these instruments is the European stability mechanism which is a permanent and new financial institution mandated to lend up to 500 billion euros to euro area member states. Other instruments exist also for the members of the Union who have not adopted the euro yet. Since 2008, seven out of the 27 member states of the Union have received official assistance and an eighth one is currently negotiating such official support. Typically, funding has come from the IMF for one third and from the applicable instruments of the Union for the remaining two thirds while the active involvement of the European Central Bank has been sought. While the total loan envelope is determined, effective disbursements of the loan take place in quarterly installments after experts of the lending institution's review and deliver a positive opinion upon the implementation progress with a predefined so-called economic stabilization program. This program details the specific policies and attached deadlines that the government must follow with respect to fiscal, structural and banking issues. It is a de facto conditionality agreement between the lenders and the borrower that is meant to ensure that economic imbalances are resolved and funds will be properly spent. Thus, the overall economic and social impact of the official foreign assistance is determined by the economic stabilization program itself. In order to understand its basic features, we must compare it to its counterfactual, namely how fiscal and economic imbalances would have been addressed without foreign assistance. In a nutshell, this counterfactual would have consisted in a market-driven restructuring of both the economy and public finances. To begin with, the government's funding difficulties would have resulted into restructuring of its spending. Expenditure cuts would have been simply unavoidable in the absence of official assistance. The economic role of the high interest rates that private lenders start to ask is precisely to signal the increased scarcity of funds and to impose a lower expenditure pattern on the government. A self-imposed correction based on higher taxes would not convince financial markets. First, higher taxes would not address the structural problem that is at the origin of the high public deficit. Second, they would undermine future productivity and the capacity of the government to easily generate additional revenues. The adjustment of government expenditure to the available tax revenues would also automatically contribute to addressing weaknesses in the economy's structure of production. A cut along all forms of subsidies would lead to the bankruptcy of businesses which were artificially maintained at a cost for the taxpayer. The subsequently released factors of production, including labor, would be redirected to sectors where they would be better employed, even though at a lower nominal remuneration. A market-driven restructuring in government finances would, in a sense, free the economy from that part of the government's interventions which private lenders consider excessive. The market-driven solution would also make lenders aware of their own responsibilities. Beyond the point, the restructuring of government activities would also include a rescheduling of the outstanding public debt, which would imply losses for the investors in sovereign securities. Such losses would result in an appreciation of the risk associated to public debt. And then, in higher yields, asked for funding governments. This would be the ultimate sanction that would guarantee long-term discipline in public finances, both ex-posts and ex-ante. In a sense, the very possibility for a market-driven correction of government excesses would prevent such excesses from arising in the first place. Against this background, an official economic stabilization program clearly thwarts this natural adjustment process. In essence, the cheap official funding allows the government to maintain its overall size without scaling down. Nevertheless, because the reality of the imbalances could hardly be denied, the necessity for adjustment is fully recognized both by the official lenders and the borrowing government. Now that the market-driven correction is precluded, the adjustments must then take the form of administratively decided and implemented policy actions. This sheds new light on the nature of the so-called conditionality, often presented as a means for avoiding the buildup of moral hazard caused by the cheaper than the market funding granted by official lenders. Conditionality appears to be much more fundamental and implied in the very notion of intergovernment support, not to say that its actual record in effectively preventing moral hazard has been rather poor. The key problem with an administratively decided stabilization program is that it is trapped in an inescapable internal contradiction. On the one hand, the provision of sufficient financing to cover the government's funding needs over the next years, typically next three years, reduces obviously the urgency to adjust public finances and to undertake long-term oriented structural reforms. On the other hand, the policy conditionality itself is rooted in the idea and full awareness that an economic adjustment is much needed. This fundamental contradiction leads to very low incentives to implement unpopular, though necessary reforms. It also implies that, in practice, an official stabilization program is unlikely to succeed. The official creditors do not have sufficient knowledge where the imbalances originate from. It is not enough to point at excessive public deficit and debt. One must also find which government programs and policies are at the origin of the unsustainable spending. At the same time, assisted governments have little incentive to sort out their finances and to terminate policies and practices that create financial holes. Why would the government fight bureaucratic resistance if funding is, after all, available? The typical response to this knowledge and the incentives problem is to impose only a very gradual correction path on the general public deficit and to subsequently adjust the conditionality requirements to the effective progress made by the government. Thus, while some broad expenditure cuts are imposed, it is fundamentally up to the borrowing government to specifically identify them and to ensure their implementation. Let me now examine the economic consequences of intergovernment support programs in some further detail. From the outset, an official loan implies the bailout of holders of public debt. That is domestic and international banks or other investors, such as pension funds and insurance companies to which fractional reserve banks also have an exposure. Because the official loan reduces the likelihood of losses for private investors, the market price of public debt does not decline as much as it would have declined otherwise. An official loan contributes then to maintaining the value of assets of investors in public debt above what their portfolio would be worth in the case of a market-driven restructuring. It produces a counterfactual redistribution of wealth from taxpayers to the government's creditors and most notably to the fractional reserve banks. Indeed, in Finne, the official loan is to be repaid out of future taxes. Hence, an economic stabilization program implies stronger future taxation. That is, a heavier government weight on the economy, the exact opposite of the counterfactual market-driven solution. An immediate first-round impact of an official foreign loan is to increase the liquidity of the domestic banking sector. This is due to the fact that part of the additional funding is spent on goods and services, including publicly employed labor, offered by residents. As the government spends more than it would have spent otherwise, revenues of state-employed factors of production are higher and so are their owners' deposits at commercial banks. The banks, which are the ultimate beneficiaries of the increased liquidity, can use it for repaying their own creditors or otherwise improving their profitability by expanding bank credit to the economy. Thus, a foreign-funded economic stabilization program is imminently inflationary. Even when it is nominally limited to supporting the government alone, it contributes to refinancing all debt-based relationships created by the fractional reserve banking system. Given that they prevent local episodes of deflation and contribute to coordinated global inflation, official loans and the intergovernment cooperation that puts them into place are definitely driven by the phenomenon of monetary imperialism. The specific economic policies that accompany the official loan can be categorized in three areas, fiscal, structural, and banking. In the area of fiscal issues, it is required that the government gradually reduces its deficit over a number of years to a level considered sustainable. The sustainability is determined mechanically based on the growth projections and the subjectively determined acceptable level of public debt. While in the European Union, the sustainability threshold for public debt has long been put at 60% of GDP, that is of the gross domestic product of the economy, it has been doubled since the crisis. Similarly, deficit requirements are not determined in terms of effective nominal targets but relative to structural targets, that is allowing for cyclical slippages in public spending during the bust. Finally, only part of the deficit correction comes from expenditure cuts. Tax hikes or an expansion of the taxable base are equally popular tools. Thus, an official foreign loan becomes an effective instrument for international tax harmonization. Tax optimization opportunities for individual investors are reduced, which is a clear benefit to the foreign credit estates. The so-called structural policies relate to the fundamental conditions of conducting economic activity, such as labor contracts, pension arrangements, state monopolies, protected professions, or trade barriers. The required adjustments in these areas are meant to increase the economy's overall productivity and its international competitiveness in order to generate sufficient surpluses that would allow the timely repayment of the overhang of foreign debt. However, structural policies are also extending the notion of improved efficiencies to areas such as tax collection, public finances framework, and tax evasion. While structural policies do introduce higher economic freedom in some sectors, they also lead to a stronger government in general. In addition, much bolder and genuine reforms would have been implemented had the national authorities not received an official foreign loan. It is alleged quite often that the conditionality attached to the foreign loan is the best opportunity for policymakers to carry out reforms that would have not been implemented otherwise, for lack of sufficient degree of social support. The truth, however, is that this argument wrongly compares the structural reforms under the loan conditionality to the situation prior to the government's financial difficulties and that it ignores the impact of the cheap official financing. Finally, the third policy area included in the program covers the banking sector itself. Measures here aim at ensuring that banks are adequately capitalized and provided with sufficient liquidity. Undercapitalized banks, whether effectively or in light of the projected results of stress tests, receive state-funded capital injections which are financed by the foreign official loan. In the event where the undercapitalized bank is also deemed non-viable, restructuring and resolution are applied, such as dividing the bank into two institutions, a good bank and a bad bank, or consolidating it with another entity. Without going into the detail of all possible banking sector measures, a common feature can be recognized. The fractional reserve principle of modern banking is maintained while accidental changes in the business landscape are voluntarily admitted or even actively promoted. As a result, the banking sector is even more regulated, supervised and controlled by governments. In substance, everything is done to avoid the far-reaching reform Hayek has called for. This summary of the stabilization policies required by an official foreign lender shows that genuine problems are tackled by half measures. Even though some benefits could be expected in the long run, they are immediately offset by increased government involvement in economic life. As a consequence, administrative programs are bound to yield poor results which would quickly be used as evidence for the need for further government involvement. In a nutshell, economic stabilization programs promote anti-free market reform sentiments. This raises the broader question whether such programs are not anti-reformist in their very nature. And there are strong reasons to believe that this is indeed the case. First, the economic conditionality attached to the loan delays or even precludes some critical reforms. Second, the loan brings about a generalized bailout of all credited to debt relationships and an increase in the money supply, both of which tend to maintain the social and economic status quo. The higher future taxes, which are the necessary implication of a foreign bailout, put a burden on the future wealth to be produced by the economy, that is, on the younger generation. At the same time, current owners of wealth which has been accumulated in an unsustainable manner are mostly shielded from bearing losses. Thus, a bailout hinders free entrepreneurship and precludes the natural renovation of the economic elites which market-driven bankruptcies would have generated. These conclusions are strengthened when we consider what would have been the specific impact of a market-driven restructuring on the banking sector. The unavoidable cuts in government spending would have resulted in a lower income for state-employed factors of production and subsequently in much lower liquidity within the banks. This would have led to a lower capacity of the economy to reimburse debts, to a surge in the non-performing assets on banks' balance sheets and hence to the need to acknowledge unforeseen losses. A market-driven restructuring would have resulted, therefore, in an initial contraction of the money supply which would have been further amplified by banks' own financial difficulties and, most certainly, bankruptcies. Reflection of reserve banking system would have imploded in such a deflationary environment due to its own structural vulnerabilities. The main macroeconomic achievement of an official foreign loan is to avoid precisely this outcome, to ensure that the money supply does not contract and that banks do not go bust. The end result is that financial instability remains embodied into the system despite all official attempts to limit crisis and their international transmission. The preservation of the fractional reserve banking which might be seen as the very rationale for the intergovernment cooperation becomes a cause for the buildup of additional imbalances and then for further cooperation and monetary expansion. In conclusion, Hayek's early work on international monetary relations is strikingly topical. He has argued convincingly that the fractional reserve principle is a major cause of imbalances in the international economy. My goal here has been to further substantiate this insight on the ground of paper money's political nature. This specific aspect of modern banking is an independent source of international conflicts which find a temporary resolution in the phenomenon of monetary imperialism. Its current outcome is increased intergovernment cooperation and further political centralization. The structural weaknesses of fractional reserve banks are the main driving force of these developments. This highlights once again Hayek's crucial insight that the fundamental banking reform is a necessary prerequisite for any monetary reform aiming at international stability. Thank you.