 This weekend we continue our series of talks with Mises Institute summer fellows and our guest is Carl Friedrich Israel He is a PhD candidate in economics under professor Guido Holzman at the University of Angers in France The focus of Carl Friedrich's research is to identify and confront the prevailing arguments for central banks Carl and I discussed the current situation in Greece not only from his perspective as a critic of an expert concerning central banking But also his perspective as a German It's interesting that old hostilities between the north and the south in Europe are being inflamed Which calls into questioning the entire purpose of the eurozone and European integration Would Greece actually be better off simply leaving the euro behind and resurrecting the drachma and with the less Propagate eurozone nations actually cheer this and finally has the ECB failed as Miserably as our own Fed here in the US and creating price stability and prosperity If you're interested in what's happening in Greece and you're interested in ECB generally stay tuned for a great interview Carl Friedrich Israel. Good morning. Thanks for joining us on Mises weekends. Thank you for having me now before we begin Let me just ask you a broad question How did you come to learn about and become interested in Austrian economics and how did you meet and come to study under? Guido Halsman. I started studying economics back in 2008 at Humboldt University in Berlin in my first year of undergraduate studies I participated in an essay contest organized by the Hayek Society I didn't know much about Hayek at this point, but I started reading Hayek one of my first books was the road to serfdom and of course from Hayek It wasn't a great step to find out about Mises and about the Mises Institute here in Auburn and about Rothbard and I Started reading them and I became interested in Austrian economics in my second year. I decided to do an exchange program which my department in Berlin offered an exchange program with a Small school very prestigious school in Paris So I studied for two years in Paris and that was where I met Guido Halsman I've read his Mises biography, which I liked quite a bit and I contacted him I found out that he organized research seminar in Paris And I asked him whether I could attend the research seminar and he was very friendly and he invited me so I attended a couple of times and After my two years in Paris, I went to England for one year and then back to Germany for another year But over all this time we stayed in contact We met regularly at conferences in Germany and France then I asked him whether I could do my PhD under his Advice and he accepted me. Well, so you had to travel to Paris to get to the home of austral libertarianism That's interesting. You have studied at length Conceptually central banks around the world before we get into that further I'd like to ask you as a German especially what your opinion is of the ongoing Crisis in Greece one of the leading German economists has Recently in a publication compared the Greece situation to the so-called Dutch disease back in 1960 when the Netherlands Discovered huge natural gas resources. They could exploit those resources and live of exploiting those resources and They became fairly wealthy fairly rich and it allowed them to increase wages and prices within the economy Faster than the actual productivity grow and when the production of gas diminished after some time The economy was pushed into a recession They had to go through a painful adjustment process in which wages had to fall and prices had to fall But after all today, they are a stable economy in Europe and to some extent the situation is similar in Greece But of course Greece has not been exploiting a natural resource, but a rather unnatural resource namely the euro which is a central bank controlled fiat money and after the introduction of the euro huge amounts of Liquidity and form of credit flowed into the Greek economy which allowed them to increase wages and Prices and welfare spending above that productivity level and so that's why today They are not competitive in the international markets and that's why they have problems But it's interesting apart from just the mechanics of the debt the debt that's owed by Greece There's also the political angle of all this I'm reading today in the Washington Post about this image of the cruel German Returning and in effect the ECB has become a political project of sorts has it not it's it's actually Serving now to inflame some of those old post-war tensions that existed between the north and the south in Europe. Yeah, that's true There are some interesting facts And this is not surprising that the Germans are discontent with the situation in Greece and Greeks are discontent with what is happening in Germany all that they don't like the German conditions that come with the rescue credits So for example as I've mentioned wages are inflated in Greece Let me give you some examples in manufacturing the average hourly wage Is twice as high as in Poland and Poland is of course not part of the euro zone But there are other examples Pension payments in Greece are on average higher than in Germany It's not surprising that Germans when they hear those empirical facts that they cannot understand that why do Greece pay higher pensions than we do in Germany and why do we have to give them all this rescue? So in fact the big project of European integration in some respect turns out to be Counterproductive well reinforces nationalist impulses in some senses. That's true Now if we go back to the founding of the euro itself and the ECB within the euro zone at the time was it really recognized that it was it was crazy to have a Single currency among these nations, but still allow them to produce their own central sovereign debt through their own central banks It is not crazy to have a single currency, but it is crazy to have a single currency which can be exploited by Sovereign national banks. This is what Greece has done through for example through the illa Mechanism emergency liquidity assistance. So Greece was essentially able to grant itself credit From this illa mechanism because in order to stop Greece a two-third majority would have been necessary within the ECB council and back then in 2012 the six crisis-stricken countries Ireland, Italy, Spain, Portugal, Cyprus and Greece had More than a third of the votes. So it was very hard to stop them to grant themselves credit This has changed now Because Latvia and Lithuania have entered the euro zone in 2014 and 2015 So now it has become easier to stop those credits But this makes Philip August's point that the euro operates more as a political project than a real currency That's true. Absolutely true. As a German, I'd like your thoughts Do you think the average hard-working German or Dutchman or Belgian feels aggrieved under the euro zone? In other words, do they feel as though they are Subsidizing countries that are economically less productive like like the pigs Portugal, Ireland, Greece, Spain Yes, I think they do. In fact, there never has been a majority for the euro at least in Germany That's what I know. So there always have been quite some skepticism towards the Eurozone and towards the integration of Europe through this monetary measures in Germany And now as I mentioned earlier Seeing that welfare spending at least partly is higher in Greece than in Germany Just reinforces this feeling of some Germans that we are effectively subsidizing this country We have to give them liquidity and they don't they don't seem to be willing to lower the standard of living Which of course nobody wants to lower the standard of living, but this is what needs to be done So part of your work here this summer at the Mises Institute is Discussing confronting some of the prevailing arguments in support of central banks and central banking Could you just sort of lay out for us as a devil's advocate? What are some of those arguments and how do you refute them in your work? I think one of the most important arguments at the beginning was the argument of price stability So the idea that we need a flexible Money supply that can be expanded in accordance to real economic growth so that we have Stable prices or a stable price level and this argument still today It seems to be very important because when the ECB started to buy government bonds directly There has been an opposition in Germany and lawsuits against the ECB have been brought to the European Court of Justice they argued that those Purchases of government bonds are against European law because direct the government financing is prohibited, but of course the European Court of Justice, which is based in Luxembourg Decided in favor of the ECB measures. They argued that no this is within the legal boundaries of the ECB because it belongs to the category of monetary policy and they do that in order to stabilize the euro in order to stabilize the purchasing power of the euro So we have this argument still today What I would argue is that what is today called price stability is not stability at all This can be seen by the very definition of price stability that the ECB proposed price stability for them means an inflation rate close to 2% Same as in the US our fed's target is 2% Exactly, which means that in 35 years on average the currency will have lost half its value Right, and what's interesting is this inflation is an express policy of the government we pay for in effect Right, this isn't just a symptom of mismanagement. It's an express policy Right right from your perspective in the much shorter history of the ECB versus our fed Have they succeeded in creating price stability within the eurozone? No, they haven't since the Establishment of the Federal Reserve in the US and the US dollar has lost well according to official statistics 98% of its purchasing power 96 close to 200 percent and The developments are similar in other countries. This is the same in the eurozone today And it has been the same under the Deutsche mark as well The Deutsche mark seemed to be stable just because it was relatively less inflation is then for example the French wrong or the Italian leader, but it still was inflationist and then big part of the purchasing power has been lost under the Policies of the Bundesbank now does the ECB have an employment mandate like the Fed There's a difference here the Federal Reserve Operates under a so-called dual mandate so they try to maintain price stability and Economic growth and employment on equal footing. So they are to some extent inherently more Flationist than the ECB because the ECB has an hierarchical mandate which says first of all comes price stability and after that Real economic targets employment and growth when we look at the euro in terms of It's endgame some people talked about the Greek exit as the straw that would break the camel's back and begin the beginning Of the end of the euro. Do you do you think that's true? Or do you think the euro has real staying power in the coming decades? It seems as if the leading Nations within the eurozone want to preserve the currency union. They don't want to let Greece exit the euro Angela Merkel right now is lobbying for more rescue credits for Greece in order to Keep Greece within the union one of the leading German economist Hans-Werner Zinn has proposed that it would be better if Greece left the eurozone sure Introduced the Drachma again and then devalues the drachma against the euro so that they restore Competitive I'm not sure whether this is the best solution But anyway, it is pretty clear that what needs to be done is Price adjustment and wage adjustment process in which way I don't know But prices and wages in Greece as compared to other countries have to fall Well, a lot of people including Nigel Farage have suggested going back to the drachma, but diluting the drachma Doesn't create any wealth. It just transfers wealth from savers to let's say Greek exporters So in and of itself allowing the currency to to float to a natural level and devaluing it would not make Greek people more prosperous But I would suggest that it might give them more sovereignty and more say over their future That's true They might have more sovereignty and they might have an independent central bank that can inflate Their own currency as they please but I don't know whether this is the best solution the Greek Government seems to be inspired by Keynesian policy Prescriptions, I don't know whether the Greek people or the country would be better off if they had an independent Central bank and their own currency. So can you elaborate on your thesis your findings? Well in terms of your study of central banks What would be the if you could make one point to someone who's talking to you about the folly of central bank What would that point be? I'm studying central banking, especially under fiat money because it is Essentially fiat money that makes most of the arguments for central banks practically relevant because under fiat money the supply of Money is subject to political will it can be extended at Virtually zero costs right and I would argue that this is the very danger of fiat money You provide central banks with a very powerful tool which Seems according to historical experience seems to corrupt people and this is the point made by your mentor About the ethics of money production right is that there's not just economic consequences to fiat currencies But there's deep seeded cultural Consequences to fiat currencies for example people become more high-time preference and they don't say for the future as much That's true. I think this not only economics that is important here to understand the dynamics of central banking and of fiat money in my Research I focus more on the economic arguments But I see that there are a lot of other arguments from other areas of the social sciences and ethics I oftentimes ask myself. What is the more powerful argument against or for central banks? Is it an economic one or is it an ethical one and at times? I think the ethical argument might even be more powerful To persuade people. Oh, I agree with that completely. That's that's a fascinating point Carl Friedrich as we wrap this up Talk a little bit about your experience here this summer. Have you enjoyed interacting with so many fellows from around the world? And and what is what is being a summer fellow at the Mises Institute been like for you? first of all I'm very grateful for being here to get to use all these resources and materials that you have Accumulated over the years here. I'm very happy to get in touch with some of the leading Austrian economists and libertarian philosophers and Let me just tell you a little anecdote a good friend of mine from Berlin He was looking for a book which he couldn't find in any of the university libraries in Berlin Hmm, it was philosophy science and method essays essays in honor of Ernest Nagel and Ernest Nagel was of course a professor of Barry Rothbard at Columbia University and so he emailed me and asked me whether I could look for the book It might be here at the Institute and it turned out. Yes There was a copy of this book here in the Institute in the Gary North collection So a book that none of the university libraries in Berlin could provide I found it here at the Mises Institute in Auburn Well, that's interesting and as an aside with about 30,000 volumes we are one of the largest private libraries in the entire southeast of the US and with that Carl Friedrich, thank you so much for your time. Ladies and gentlemen. Have a great weekend