Book Description

Johan Van Overtveldt provides comprehensive documentation showing that the political dithering so apparent in the most recent euro crisis has in fact been the hallmark of the euro project from the start. --Anil Kashyap, Edward Eagle Brown Professor of Economics and Finance, The University of Chicago Booth School of Business From noted economic journalist Johan Van Overtveldt, an up-to-the-minute examination of the fate of the Euro. In a process that began with the Maastricht Treaty of 1991 and concluded on January 1, 1999, 11 Western European countries made the euro the European Union's single currency, and the European Central Bank (ECB) the EU's only policy-making central bank. Bringing together Germany, France, Italy, and other European countries into a monetary union with a single currency and a single monetary policy could only ever result in major imbalances between the member countries, thus threatening the EU itself. This was recognized from the start by many economists and other observers, and the political elite paid elaborate lip service to these warnings. However, no one really followed up on these risks in terms of actions and reforms. Instead, the politicians seemed to indicate, directly and indirectly, that if the EU showed unity, the conditions to turn itself into a well-functioning monetary union would simply come about automatically. Moreover, given the imperative to work together more closely, the monetary-union effort would strengthen the political union among the euro-countries. Thus, in spirit, the process of monetary union was often seen as a means to an end. With that reasoning, the political elite supervising monetary union turned a great idea--the creation of a unified currency for Europe--into a huge gamble. Implicit in their reasoning was the idea that Europe's leading politicians would always be able to come up with an adequate solution to any crisis that might occur. As the former Belgian prime minister and European Union leader Jean-Luc Dehaene repeated relentlessly: "The idea of a unified Europe grows and becomes reality through crises. We need crises to make progress." Dehaene and like-minded European politicians never seriously considered the possibility of an insoluble, catastrophic crisis that could potentially crash the entire EU effort. For ten years, from 1999 to 2008, it seemed that the politicians' claim was vindicated. Although there was little substantial progress toward real political union within the euro area, the euro and the euro countries in general prospered, despite a string of major shocks like the bursting of the dotcom bubble, the 9/11 terrorist attacks, and the wars in Afghanistan and Iraq. But things changed dramatically with the financial crisis of 2007-2008. In January 2009 Barry Eichengreen, professor of economics and political science at Berkeley, wrote that "what started as the Subprime Crisis in 2007 and morphed in the Global Credit Crisis in 2008 has become the Euro Crisis in 2009." After its immediate impact, the crisis caused the financial and capital markets to worry about the so-called sovereign risks, i.e. countries running the risk of becoming insolvent. Although budget deficits in countries like the United States and the United Kingdom were much larger than the aggregate data for the euro area, markets started to home in on the risks posed by countries inside the European monetary union. Markets recognized that the enormous problem facing everyone in the union was the long-term working of the monetary union itself. Eichengreen's "Euro Crisis" is all about the sustainability of EMU and the single currency. By early 2009 the structural imbalances within the euro area and especially the untenable situations building up in Greece, Portugal, Spain, and Ireland were there for everybody to see. The first reaction of the political leadership was denial of any structural problem whatsoever. The second reaction was recognition of the crisis situation, but absolute denial of any link between that crisis and the workings of the monetary union. Eventually, a third phase set in: the search for external villains to blame. Those villains were found in the greed, speculation, and irresponsibility of the financial markets. As the French saying goes: "les excuses sont fait pour s'en server" ("excuses are made to take advantage of"). Fundamentally, however, the gigantic problems facing the EMU, and the euro as a currency, have little to do with either alleged criminal behavior in the financial markets or with the financial crisis of 2007-2009. The crisis of 2009-2010 was an accident waiting to happen. It could have happened earlier, or the clash could have been postponed for several more years; but given the the basic characteristics of the EMU-set-up, a major crisis was simply unavoidable. Untenable imbalances within the monetary union were enshrined in the different treaties, pacts, and political agreements that led to the creation of the euro in the first place, and guided its first ten years. That politicians never acted on this reality to make them the prime culprits of the long and highly painful death agony of the euro. The structure of this book is as follows: Chapter I gives an overview of the birth of the euro. Understanding this history is essential to understand the anomalies built into the project from the beginning. These anomalies form the subject of Chapter II, along with an analysis of how they led to the situation that turned Greece, Portugal, and Spain into euro-destroying economic disaster areas. Chapter III shows how this was not an unforeseeable situation, as Europe's history is filled with earlier failed attempts to build monetary unions. Chapter IV is focused on Germany, by far the most important country within EMU, and why the chances of Germany leaving the union are much higher than is generally assumed. The book concludes with an analysis of what lies in wait for the remains of the monetary union--and for a deeply divided and troubled continent in general. Either the EMU transforms itself fundamentally or it disintegrates, and the likeliest outcome is the latter.