Abstract
The first two decades of the 21st century have been tumultuous for the global economy. In the decade following the unwinding of the financial crisis, we have seen a plethora of monographs dissecting the causes, consequences, and policy paths chosen to revive the economies of particular nation states or regions. Economic and financial experts have offered a wide range of judgments of the timeliness and effectiveness of the implementation of alternative policy regimes. In most cases, however, the appropriateness of the chosen policies depends upon the underlying analysis of the structural causes and there has been less than uniform agreement on those foundational constructions.
In the United States, we saw an uplifting revival after the shock of September 11th to only shortly thereafter be plunged into a financial crisis leading to a decade-long painful recovery. We have seen the devastation of the limited asset holdings of the lower middle class in the housing crisis. And stretching our gaze upward through the middle class, we notice little to no restorative gains in real incomes. A struggle was expected from the magnitude of the financial collapse and it took strong and quick reactions on the parts of monetary and expansionary fiscal policies to slowly turn the economy back to low but steady rates of growth.
In Europe, the nature of the financial crisis played out along a somewhat different and in ways more troubling path. The European Union (EU) was itself caught up in the midst of an unfinished long-term project of monetary integration. The incomplete nature of the task meant that the financial crisis played out under a less than ideal institutional framework resulting in additional complexities and public sector adjustments. The financial crisis morphed into a Eurozone crisis where the doom loop linking sovereign debt and bank solvency struck hard in several member states. Consequently, the recovery process slowed and forced experimental changes in monetary policy tools and practices along with extensive structural changes in banking regulatory frameworks.
The Euro and the Battle of Ideas is focused on the Eurozone crisis and outlines the historical development of the EU’s single currency project from a political economy perspective. The three eminent authors know the roadmap extremely well having been key players in different institutional settings as the evolving framework developed over many decades. The authors bring complementary perspectives as, respectively, a German economist, a British historian, and a former deputy governor of the French central bank. The central line of argument is built around analyzing problematic structural inadequacies in the Eurozone’s construction due to compromises resulting from fundamentally different French and German views of financial structures and banking in general. Many of these differences are linked to having dissimilar assessments with regard to the exercise of sovereign powers over markets as opposed to increased reliance on a pre-determined rules-based system.
Hidden only slightly below the surface of the primary debate is the concern with what member state duties and responsibilities will be within the encompassing Eurozone framework. The resulting assignment of duties and responsibilities across the levels of the Eurozone architecture would of course limit the degree of mutualization of risk and, therefore, establish the limits or potential for the distribution of the costs and benefits resulting from policy implementation.
The authors present an excellent historical background of the competing French and German economic frameworks ranging over balance of payments and exchange rate structures as well as practices with regard to monetary and fiscal policy regimes. The analysis is important in understanding the preferences derived from the alternative perspectives with respect to institutional frameworks operating in the Eurozone. For example, what flexibility should exist in policy making under the single mandate of the European Central Bank (ECB) to maintain price stability operationalized by a target of 2% annual inflation?
After the well-structured historical overview, the authors turn to how the Eurozone attempted to implement effective policies to deal with the Eurozone sovereign debt crisis. Here the analysis is much more technically oriented to deal with issues of liquidity crises, improper risk allocation due to moral hazard, the sovereign-bank doom loop, and monetary and fiscal policy mismatches based on weak fiscal federalism. The authors do not clearly connect the alternative French and German frameworks as effectively in evaluating policy prescriptions in these realms in part because many of the efficient solutions seem independent of those poised frameworks. For example, the sovereign-bank doom loop exists in the Eurozone framework because individual member states have relinquished their sovereignty with regard to the issuance of currency. Now a structural solution must turn to the alternatives of how to effectively limit risk exposure to sovereign debt issuance or bank holdings of such debt. There is a detailed discussion of new risk-free debt instruments to help solve this problem.
The final sections of the book attempt to examine relationships with external global partners, both allies and competitor states like the United Kingdom, the United States, China, and Russia as well as global institutions like the International Monetary Fund and the Bank for International Settlements. This includes outlining and contrasting ECB monetary policy innovations during the crisis with other central bank policies and institutions in providing liquidity directly or indirectly to banks, governments, and the private sector. These ECB tools would include the Securities Market Program, Outright Monetary Transactions, Quantitative Easing, and Emergency Liquidity Assistance.
One major important update to the book would be to present an extended analysis of the later crisis innovations in the areas of Banking Union. The innovations begun in 2014 in bringing regulatory unification under the directorship of the ECB is path breaking in terms of the potential to unify the Eurozone. The Single Supervisory Mechanism and the Single Resolution Mechanism, based on the “single rulebook,” have now overturned significant portions of the Franco–German divide under an instance of crisis decision making.
In summary, The Euro and the Battle of Ideas provides an informed general audience an excellent background to the formation of the EU’s Eurozone project and guides the reader through the major conflicts and resolutions of the financial and sovereign-debt crises. It also demonstrates effectively that the core Franco–German disputes have been confronted in a productive fashion under the severe pressures of the crises. There is reason to be somewhat optimistic that at least agreement has been reached on the nature of the challenges going forward.