Europe Ended Up Someplace Else - Ashoka Mody Based on EuroTragedy: A Drama in Nine Acts, New York: Oxford University Press, June 2018 - Bruegel
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Europe Ended Up Someplace Else
Ashoka Mody
Based on EuroTragedy: A Drama in Nine Acts, New York: Oxford
University Press, June 2018
Thesis: Monetary union would lead to Europe to political union. Did it?
• Thesis stated in Werner Committee Report, October 1970: A single European
currency would act as “a leaven [yeast] for the development of political union.”
(Pierre Werner, Prime Minister of Luxembourg).
Another metaphor: “falling forward” from crises to greater unity.
• Outsider’s warning: Nicholas Kaldor, March 1971, on Werner Report:
o Single currency would amplify economic divergence, and
o A house “divided against itself cannot stand.”
(Kaldor, University of Cambridge, one of the greatest economists of the 20th century.
Could be ignored because he was Anglo-Saxon, although of Hungarian origin).
• Steps to counteract economic divergence would be impeded by the sovereignty
barrier: Robert Marjolin, crucial catalyst of the Treaty of Rome, first vice
president of the European Commission, repeatedly said European leaders were
“obviously not ready” to give up their core sovereign functions; the change
required was “too profound,” he said. Marjolin was also ignored.
A flawed euro, which the French desperately wanted, on German terms
• Despite serious initial misgivings,
Chancellor Helmut Kohl pushed the
euro, overriding deep public
opposition to giving up the deutsche
mark
• In seeking the Bundestag’s
authorization on April 24, 1998, he
twice said:
• “According to the treaty rules, the
community shall not be liable for the
commitments of the member states
and there are no additional financial
transfers.” Translation: Germany will
not pay the bills of other member
countries.
• The euro would ensure Europe’s
peace became his mantra.
But there was no conception of what the end goal was
…and, hence, no idea of how Europe would get there
“If you don’t know where you are
going,
You'll end up someplace else.”
Yogi Berra
This was the tragedy: the euro
inevitably pushed Europe into a
someplace else that was not good.
Europe: a divided continent
The great divergence in euro-area incomes and employment.
Per capita incomes Unemployment rates
(In thousands of US dollars, corrected (Percent)
for purchasing power parity)
50 13
48 12 Italy
Germany
46 11 France
10
44
9
42
France 8
40
7
38 6
Italy Germany
36 5
34 4
2003 05 07 09 11 13 15 2003 05 07 09 11 13 15
Sources: Conference Board, “Total Economy Database (Adjusted Version),” http://www.conference-
board.org/data/economydatabase/; IMF, World Economic Outlook Database,
https://www.imf.org/external/pubs/ft/weo/2017/01/weodata/index.aspx.
The great euro-area north-south divergence: Public debt and youth
distress.
Public debt Youth unemployment and inactivity
Italy 2007 2007
2017 2016
Greece 2007 2007
2017 2016
Spain 2007 2007
2017 2016
France 2007 2007
2017 2016
Portugal 2007 2007
2017 2016
Finland 2007 2007
2017 2016
Austria 2007 2007
2017 2016
2007
Germany 2007 2016
2017
2007
Netherlands 2007 2016
2017
0 5 10 15 20 25
0 50 100 150 200
Percentage of population
Public debt as a
15 to 29 years old
percentage of GDP
Inactive Unemployed
Source: IMF, World Economic Outlook Database; Eurostat (edat_lfse_20). Note: Countries on the left side
correspond to the countries on the right side. The “unemployed” are those who are looking for a job but are unable
to find one; the “inactive” are not looking for a job and neither are they in an educational or training program. The
sum of the unemployed and inactive is known as “neither in employment, education or training” (NEET).
Divergence was predictable, not an accident:
Single monetary policy places greater burden on economically and socially
weaker countries, especially—though not only—at moments of crises
They have limited governance and growth buffers
The global financial and eurozone crises proved to be a historic economic
critical juncture.
• At that juncture, north and south eurozone countries, using the same
currency, set off on different economic trajectories.
• While the weaker southern members suffered wounds and carry long-
lasting scars, the stronger northern eurozone members seem to have
emerged with minor injuries.
• The divergence between the hobbled south and largely healed north will, I
expect, persist— and it will further test the functioning and integrity of the
eurozone.
Divergence was predictable, not an accident: southern euro area suffers
from weak governance and institutions, which weaken growth potential:
The euro is cruel on countries with low growth potential
Italy 1998
2015
Greece 1998
2015
Spain 1998
2015
France 1998
2015
Better governance
Portugal 1998 and institutions
2015
Finland 1998
2015
Austria 1998
2015
Germany 1998
2015
Netherlands 1998
2015
0.0 0.5 1.0 1.5 2.0 2.5
Source: World Bank, Worldwide Governance Indicator. Note: The overall index presented is an average of
measures of government effectiveness, regulatory quality, rule of law, and control of corruption. Each individual
measure is normally distributed, with a mean of zero, a standard deviation of 1, and an approximate range of –2.5
to 2.5. Larger values indicate better governance.Poorer long-term growth prospects a trap: persistently low R&D rates in
the euro-area periphery, hence persistently low growth potential.
(R&D as a percentage of GDP, 2016 versus 1997)
3.5 Sweden
Austria Germany
R&D/GDP ratio (percent) in 2016
3
Denmark
Finland
2.5 United States
Belgium
France
2 Netherlands
United Kingdom
1.5 Italy
Portugal
Spain Ireland
1 Greece
0.5
0
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5
R&D/GDP ratio (percent) in 1997
Source: OECD Statistical Database.Predictably, German exporters shift their sights away from the euro area.
(Percent of total German exports to the various countries)
12
France Czech Republic,
Hungary, and Poland
10
8
United States
6 Italy
4
China
2
0
1999 2007 2016
Source: IMF Data, http://data.imf.org/regular.aspx?key=61013712.
German exporters will continue to shift away from the euro area.Despite economic recovery, foreign investors continue to flee from Italy,
Spain, and Portugal.
(Capital flight financed by ECB funds, percent of GDP)
10
0
Greater capital flight
-10 Italy
-20
Spain
Portugal
-30
-40
-50
2007 08 09 10 11 12 13 14 15 16 17 18
Sources: Target2: ECB Statistical Data Warehouse (compiled by Euro Crisis Monitor, Institute of
Empirical Economic Research, Osnabrück University); GDP figures from Eurostat. Note: The figure
shows each country’s Target2 balance with the ECB. A negative Target2 balance implies that the
national central bank had to borrow from the ECB to buy its government’s bonds from investors.
The investors who sold the bonds did not reinvest the funds in the country.Kaldor’s ghost stalks the eurozone
The political critical juncture:
Politics tried to override economics, economics now
had its revengeItalians lost trust in Europe: economic wounds left political scars
(Decrease in percentage of respondents who trust the European Union, 2016 relative to 2001)
Italy France Germany
0
-5
-10
-15
-20
-25
-30
-35
-40
Source: Standard Eurobarometer survey, available at http://zacat.gesis.org.
Note: Respondents answered the following question: “I would like to ask you a question about how
much trust you have in certain institutions. For each of the following institutions, please tell me if
you (Tend to trust it; tend not to trust it): The European Union.” The chart presents the change in
share of people who said they trusted the EU. For each year, 2001 and 2016, responses for the two
available quarters are averaged.The dialectic: Merkel as European chancellor held eurozone together, but became
polarizing force
• In Italy, the February 2013 election was
dominated by Italy’s approach to Europe:
the anti-euro Five Star Movement gained
25 percent of the vote. Silvio Berlusconi,
whose party also performed well, asked at
his rallies, “Do you want a government
that that is subject to the diktats of
Europe?” Pro-European Mario Monti was
Between 2010 and 2016, Merkel electorally humiliated.
was de facto European • In Germany, a small group from Merkel’s
chancellor, a goal that Kohl had Christian Democratic Party (CDU) felt
dreamt of. Merkel was doing too much for Europe.
Ipso facto, she became a They spun off a new party, Alternative
politically polarizing figure, für Deutschland, initially as an anti-euro
dividing Europe. party and then as an anti-immigrant party.If the economics of the euro divides, can the force of
history or shared values bring Europe together?
Marjolin’s ghost stalks: The sovereignty barrier is stronger
than ever beforeThe myth of Franco-German friendship.
(Frequency of reference to “Franco-German relationship” and “Franco-German
friendship” in books digitized by Google)
0.0000025%
“Franco-German relationship”
0.0000020%
0.0000015%
“Franco-German friendship”
0.0000010%
0.0000005%
0.0000000%
1900 10 20 30 40 50 60 70 80 90 2000
Note: The graph was created using the Google Books Ngram Viewer,
https://books.google.com/ngrams/info. It reports the frequency with which the phrases “Franco-
German relationship” and “Franco-German friendship” are mentioned in English-language books
scanned by Google.At the December 2012 European Council, Herman Von Rompuy proposed a eurozone budget. Merkel asked, “Where will the money come from?” French president François Hollande helpfully suggested to Merkel that she think of it as a “solidarity fund.” Again, Merkel coldly asked, “And where will the money come from?”
Macron’s election revived the Franco-German friendship narrative
as a force to renew faith in Europe.
(Monthly, March 2017=100)
1200
1000
“Deutsch-
800 französische
Freundschaft”
600
400
“L'amitié
200 franco-
allemande”
0
Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
17 17 17 17 17 17 17 17 17 17 18 18 18
Source: Factiva. This graph reports the frequency with which the phrases “Deutsch-französische
Freundschaft” and “L’amitié franco-allemande” are mentioned in Factiva’s global news database.But national interests remain supreme: the last time the French successfully
led a European unity initiative was in May 1950If not economics and history, can social democrats unify Europe around
values of social justice and open society?
German Social Democracy’s Decline.
(Frequency of reference to “Sozialdemokratie” and “Socialdemokraten” in German-language books
digitized by Google)
0.0050%
0.0045%
"Sozialdemokratie"
0.0040%
0.0035%
0.0030%
0.0025%
0.0020%
"Sozialdemokraten"
0.0015%
0.0010%
0.0005%
0.0000%
1870 80 90 1900 10 20 30 40 50 60 70 80 90 2000
Note: The graph was created using the Google Books Ngram Viewer, https://books.google.com/ngrams/info. It
reports the frequency with which the phrases “Sozialdemokratie” and “Socialdemokraten” are mentioned in
German language books scanned by Google.German social democrats are intellectually exhausted—and committed to
national interests
• Martin Schulz’s eccentric proposal
was detached from historical reality.
• He arrogantly assumed that he can
force member states to “automatically
leave the EU.”
• Then, the new German finance
minister Olaf Scholz says in the
Bundestag that, irrespective of party,
a German finance minister must give
overriding preference to German
interests.Europe: A declining continent
Compromise to achieve political unity is also harder because
Europe is a declining continent
(Country’s share of world GDP, percent)
December 1969, Summit of March
10 European Leaders begins 1979,
Monetary Union plans Exchange
9 Rate
8 Germany Mechanism
(ERM)
7 introduced
6 France
5
4
3
2
1870 80 90 1900 10 20 30 40 50 60 70 80 90 2000
Sources: Angus Maddison, “Historical Statistics of the World Economy: 1–2008 AD,” University of Groningen,
http://www.ggdc.net/maddison/oriindex.htm, series “GDP.” The values for 2009 and 2010 are from the Conference
Board (GDP adjusted for purchasing power parity, series “GK GDP”), https://www.conference-
board.org/data/economydatabase/index.cfm?id=27762.The crisis sets the euro area back, both compared with the United States
and relative to its own pace after the Great Depression.
United States Euro Area
120
GDP=100 on starting date GDP=100 on starting date 120
115 115
110 110
United States
105 Euro Area 105
2007–2017
2007–2017
100 100
95 95
United States
1929–1939 Euro Area
90 90
1929–1939
85 85
80 80
75 75
70 70
1929 31 33 35 37 39 1929 31 33 35 37 39
2007 09 11 13 15 17 2007 09 11 13 15 17
Sources: Angus Maddison, “Historical Statistics of the World Economy: 1–2008 AD,”
http://www.ggdc.net/maddison/oriindex.htm; International Monetary Fund, World Economic
Outlook Database, October, “Gross Domestic Product, constant prices.”The future does not look any better:
Asia surges ahead of Europe in the technology race.
(US patents granted annually to companies in different countries, numbers in thousands)
18
Republic of Korea
16
14
12
Germany
10
8
China
6
4 France
2 Italy
0
1995 97 99 01 03 05 07 09 11 13 15
Source: World Intellectual Property Statistics Database, https://www3.wipo.int/ipstats/index.htm.That someplace else has not been good
The warnings were sounded. It
need not have been. It almost was
not. The rest followed. It could
get worse, a lot worse.
• The euro has hobbled many of
its member countries.
• It has created bitter political
division among Europeans.
• This is the tragedy. Aristotle
may have said: “eminently
good and just” men and women
enacted the EuroTragedy, “not
by vice or depravity,” but by
“error or frailty.”You can also read
