The problem with the euro
The problem with the euro
Voters do not rate European elections as anywhere near as important as national ones; in a study conducted by academic Paul Statham, only 15 percent know enough to be for or against issues whereas the rest simply do not know, and many may not even be interested at all. Some European parliamentarians seem to have acknowledged their second-rate status, given the low attendance rates of many sessions. On Nov. 18, 2008, the Guardian showed on its front page a photo of the European Parliament where a debate was taking place in front of empty rows.
What are the reasons behind the general public’s apparent indifference to the European Union and the euro? Should European institutions strengthen their communication with citizens? Has enough been done to address the shortcomings of the euro area’s rules? Has the euro crisis changed European politics?
I searched for some answers to these questions in “The Euro and the Battle of Ideas” by Markus Brunnermeier, professor of economics at Princeton University, Harold James, professor of history and international affairs at Princeton University, and Jean-Pierre Landau, former executive director of the International Monetary Fund and the World Bank and now associate professor of economics at Sciences Po in Paris.
In this book, the authors argue that the main problem with the euro is due to the fundamental economic and political differences between France and Germany.
The historical roots of German-French differences can be summarized as “French centralism versus German federalism.” France’s centralized political structure goes back a thousand years whereas modern Germany has always been a federal system.
“It is this war of ideas that lies at the heart of our book. Our main aim is to provide an explanation of the long-term historical, intellectual and cultural roots of the contrasting German and French economic philosophies,” the authors write.
“The Euro and the Battle of Ideas” begins with a meeting held on Oct. 12, 2010, between German Chancellor Angela Merkel and then French President Nicolas Sarkozy. This meeting, held in the French coastal town of Deauville, changed the course of European politics. Bypassing the European institutions in Brussels, the two heads of state made a secret agreement. Germany would slacken its grip on the rules if France accepted “an adequate participation of private creditors.”
This encounter highlighted the difficulties Germany and France had faced in agreeing on an appropriate solution to the financial crisis due to their different economic visions. The Franco-German discussion also caused a genuine anger and a deep resentment among the other European leaders, including the head of the European Central Bank, when they learned of the outcome. This clash of ideas also involved Finns, Austrians, and at times Slovaks and Poles. This conflict eventually played a role in the British vote for Brexit.
Forged in crises
Jean Monnet, the father of the EU, believed that “Europe will be forged in crises, and will be the sum of the solutions adopted for those crises.” This worked well in the case of small setbacks but fell short in the wake of the 2007-2008 financial crisis. Incidentally, the only European institution that was strengthened by the euro crisis was the European Central Bank (ECB).
The contrast between the French and German economic approaches can be illustrated by looking at maps of the respective countries’ railroad systems. On the French map everything emanates from Paris, the capital, while Germany has a multiplicity of nodes, which are all interconnected.
Influenced by its federal system, German banking is largely regional and operates within a strict legal framework to preserve precisely the interests of its different regions. In France, an independent central bank is seen as incompatible with the country’s republican traditions.
However, Christian Noyer, former governor of the Banque de France, stated that the German model offered the most effective blueprint for the establishment of a new European Central Bank.
The French economy after 1945 also reflects its historic drive toward centralization. France has more firms among the 500 largest firms in the world than Germany. On the other hand, Germany has a much larger sector of small and medium enterprises, something the authors rightly see as “the incubators in which middle-class dynamism developed and galvanized society as a whole… In recent years, small businesses have been the major creators of jobs… By contrast, most large companies have tried to rationalize or downsize employment.”
The German and the French economic thinking also differs regarding cross-border capital flows. The Germans privilege free trade, fair competition, and open international markets whereas the French favor fixing exchange rates and controlling capital flows.
According to the authors of “The Euro and the Battle of Ideas,” to reach an optimal balance between the French and the German positions, policy makers need to find the right combination of immediate responses and the creation of a robust, sustainable long-term economic framework.
“In the presence of extreme adverse events, an excessive emphasis on individual liability is counterproductive. In such extreme circumstances, the solidarity principle should dominate. The European community thus needs a discussion of the extent to which it is willing to assume tail risk for its members. A commonly acceptable cutoff needs to be identified, agreed upon, clearly communicated, and enforced in future crises,” the authors write.
“The Euro and the Battle of Ideas” chronicles the complex monetary history of the euro. It analyzes the difficulties faced by two of the EU’s founding members, France and Germany, to shape an adequate common European strategy. The combination of a strong resolve and bold decisions, which led to the creation of the European community and Eurozone, are needed to respond to the challenges of the ever-changing reality.