After spending the past half a year watching the Brexit drama unfold, it’s easy to forget another Euro crisis is still simmering: that of Europe’s monetary union. For many years, starting with Greece’s sovereign debt crisis in late 2009, the Euro crisis was a staple of our daily news consumption. There was a time when Greek current affairs set the tone for international business confidence and when the uncertain future of Europe’s monetary union spooked capital markets.
Those days are long gone. At least superficially, Europe appears to have left its monetary crisis behind—so we have more time to deal with its many political crises from Brexit to refugees to the rise of autocratic governments and populist parties across the continent.
This background makes the publication of a tome on the Euro crisis look somewhat anti- cyclical. Do we really have to talk and think about it again? Are there not other and more pressing European challenges deserving our attention? And who has the endurance to read a heavyweight of a book on the intricacies of Europe’s monetary project?
To be clear, we are talking about a book of 651 densely written, single-spaced pages at a font size which will surely require a visit to the optometrist once you are done with it.
So the question must be: do we need such a book?
Ashoka Mody, a Princeton economics professor and former Deputy Director in the International Monetary Funds Research and European Departments, obviously thinks so. His masterful history and chronicle EuroTragedy: A Drama in Nine Acts was published by Oxford University Press late last year. Endorsements for his book were given by some of the best economic experts on the Euro crisis and international economics, including Nobel Prize winner George Akerlof, Kenneth Rogoff, Hans-Werner Sinn and Paul de Grauwe.
All this praise is deserved because this is the most comprehensive account to date of Europe’s venture into a single currency. No other book has compiled the historical facts behind this grand project with such depth as EuroTragedy. That contribution alone makes this book valuable. In years to come, it will be regarded as a standard work on how Europe got its common currency.
For anyone who wants to find out which forces led to the creation of the Euro and how the currency has been managed by both central bankers and politicians since, this is your book.
I write this even though I was sceptical about the author’s method of telling the story that he explains at the outset. At each stage, the debates of the time are recounted with the knowledge of the time. The reader should never feel in any way superior to the political and economic protagonists merely because of the benefit of hindsight. My initial scepticism towards telling the story this way is because the vantage point of today necessarily sheds more light on absurdities around the Euro’s introduction. However, as you read Mody’s EuroTragedy, you soon realise the value of following him on his time travel and relive historical debates and decision points with just the knowledge available at the time.
The value of this exercise is to understand that even without any benefit of hindsight, Europe’s grand monetary project was a folly every step of its way. There was simply no time in its history at which the disadvantages of moving Europe towards a single currency had not been obvious, documented and discussed.
Mody takes his readers not just through the history of Europe’s monetary union but starts his journey with the beginnings of what was to become the European Union. The story starts in post-war Europe and in his account of history it becomes clear how the European project always showed its dual nature. On the one hand, Europe was always a power play between nation states. On the other, it was held together by lofty political ambitions.
This dual nature of the European project— cold-hearted realpolitik with a façade of idealism—has always been its trademark. Europe’s monetary union is no exception. It is simultaneously part of Europe’s grand vision of a united continent and a means to an end; in this case to break Germany’s dominant role in monetary economics. Mody reminds readers how uncomfortable it was, especially for France, to see its currency come under pressure every few years against a strong Deutsche Mark.
He also points out that the reasons for such French weakness had always been domestic, namely France’s inability to reform its economy and lift productivity. However, from a French perspective it seemed easier to curb Germany than to do reforms at home.
Germany, meanwhile, repeatedly brushed off any French attempt to move towards monetary union. Mody documents well how at every step along the way until 1989 German institutions and leading politicians had consistently defended their monetary independence. This resistance was strongest within the Bundesbank, Germany’s central bank, but it was shared by the Federal Government and public opinion. It was even shared by Helmut Kohl, West Germany’s Chancellor since 1982.
But then the Berlin Wall fell on 9 November 1989, which set in train a chain of events which ultimately led to Germany’s unification, not even a year later, on 3 October 1990. And within that period, something changed. Kohl, who had previously held off French demands for monetary union, suddenly warmed towards it. In December 1989, at a summit in Strasbourg, he gave the green light for discussions on monetary union to begin.
It is in the description of the events around this crucial period in which Mody’s book is the least convincing. The way he lays it out, the reader can only wonder why Kohl suddenly changed his position. One moment, Kohl is quoted as saying that monetary union would not be in Germany’s interest. The next, Kohl boasts that without him and his dictator-like behaviour the Euro never would have been introduced. How did that happen?
Mody does not offer a convincing explanation. He speculates that French President François Mitterand persuaded Kohl to give up his resistance to monetary union by promising him a political union for Europe. He also quotes a former advisor to President Mitterand who claims there had been no link between Germany’s unification and introducing the Euro currency. But how credible is that? German news magazine Der Spiegel reported in 2010 that there had been a deal between France and Germany that to receive France’s agreement to unification, the Kohl Government sacrificed the Deutsche Mark. However, representatives of the old Kohl government were quick to dispute that there had been any secret deals at the time (and are still disputing it today).
Yet, at an event in Sydney in 2011 (which this author attended), then World Bank President Robert Zoellick told his audience that when he was the US chief negotiator in the talks which led to Germany’s unification, he was aware of the link between German unification and the Euro. He even described the Euro as the by-product of German unification. Further, in a 2017 book by German economics professor Roland Vaubel, the very same advisor to French President Mitterand, whom Mody quotes, is quoted with a statement to the contrary of the one mentioned in Mody’s book. Vaubel cites from a 1998 TV interview in which she reported how Mitterand brutally blackmailed the German government.
None of this features in Mody’s EuroTragedy. Instead, he offers an even more implausible explanation why Kohl may have given up the Deutsche Mark. After Kohl lost the Chancellorship in 1998, it became known that Kohl had built up a covert fund for party activities while he was still leader.
Kohl maintained he had received around two million Deutsche Mark from anonymous donors. Mody suggests some of this money could have come from Mitterand’s slush funds.
After everything that has been revealed about Kohl’s illegal party financing activities, this seems highly implausible.
A documentary on Germany’s national public broadcaster ARD two years ago made a convincing case for the thesis that no anonymous donors ever existed and that Kohl’s covert funds resulted from illegal party donations going back as far as the 1970s. That is what caused a major party donations scandal at the beginning of Kohl’s chancellorship in the early 1980s.
As much as the rest of Mody’s history of Europe’s monetary union is convincing, the question of how Germany switched its anti-Euro to a pro-Euro position does not get answered—or at least it is an answer that seems highly questionable.
Another element of EuroTragedy remains irritating, at least in the eyes of this reviewer. Over his first chapters, he lays out eloquently why monetary union for Europe was such a daft idea. After two decades of practical experiences with the Euro, who would disagree? However, in discussions of the Euro’s operations since it was established in 1999 (with coins and notes being introduced later in 2002), Mody constantly criticises Germany’s insistence on the rules governing monetary union. Those rules were introduced not least to calm down German fears, not least in the Bundesbank, that the Euro would not become as stable as the Deutsche Mark had been. They were also meant to prevent cross-national bailouts and enforce fiscal discipline across the Eurozone. It has to be noted how Germany itself first broke those rules when it ran deficits in the early 2000s. For this rule-breaking, Germany deserves criticism. How could Germany demand compliance from other countries while ignoring European treaties?
However, this is not the kind of criticism one finds in Mody’s book. His critique is more about the rules themselves which he regards as too rigid and counterproductive. But if the Euro area has suffered because of non- compliance with strict rules, how would it have fared with softer rules?
One may well suspect the Euro area would have morphed much faster and more strongly into a transfer union in which the richer core of the Euro area would have permanently financed the rest.
In contrast, another aspect of Europe’s integration history is brilliantly elaborated by Mody: the nature of Europe’s integration as a project of European elites. Over the past three or four years—especially with the election of Donald Trump and Brexit— many observers have identified a rift between political elites and the electorate. They see that older, mainly male voters from lower socioeconomic backgrounds outside the main cities have fallen out with the political system, its representatives and its preferred political ideas. As Mody demonstrates, this is nothing new. In Europe this process goes back to the early 1990s. Mody reminds his readers of several referenda held in Europe over the past three decades which always showed the pattern described above. Mitterand only narrowly won national popular support for introducing the Euro, but he fared poorly among those parts of society referenced above. The same pattern was repeated in other referenda on European issues in Denmark, the Netherlands and, again, in France.
In this way, EuroTragedy could be gainfully read by political scholars whose normal subject of inquiry is not European economics. The Euro tragedy is a prime example of what happens when political elites pursue their own pet projects not just against economic advice but also against public opinion. As Helmut Kohl once confessed after leaving the Chancellery, he never would have been able to introduce the Euro had he asked his people for approval in a referendum.
There is one difference between a classic tragedy and Mody’s EuroTragedy. Usually tragedies do not come in nine acts, but do end with some sort of catharsis. That solution ideally also would offer some moral cleansing.
In Mody’s EuroTragedy, there can be no such end point. His drama ends after nine acts but clearly it is not over. Of course, that is not the author’s fault. It is the nature of the Euro crisis to be a crisis as long as there is a Euro. And that means we can look forward to either a second edition or, preferably, a second volume of Mody’s EuroTragedy—maybe focussing on how Italy went bankrupt and its banking system collapsed. But that will be a tragedy for another day.