One for all . . . or maybe not
Patrick Honohanreviews The Belknap Press of Harvard University Press, 592pp, £25, By Harold James, The Belknap Press of Harvard University Press, 592pp, £25
The “old and profound liberal insight” that increased commerce reduces tensions and removes the causes of war goes back to the 18th-century French thinker Montesquieu. Yet, by 1997, Martin Feldstein, a grandee on the Republican side of US economic policy, predicted that the soon-to-be-launched European monetary union, seen by others as a further step towards the growth of commerce within Europe, would bring “civil war as states fought about secession from an economically costly union”.
That is only the most extreme of the contradictions that have characterised the debate about monetary co-operation in Europe over the past half-century. This has been not simply a debate between creditor and debtor countries, between the profligate and the thrifty, nor a divide along left-right lines within countries, but a reflection of a genuine lack of certainty about the long-term consequences of institutional design choices in this far-reaching, albeit somewhat arcane field.
Harold James, an undisputed authority in the history of international financial diplomacy, throws unique new light on this debate, based on his full access to the archives of the Committee of EEC Central Bank Governors over three decades.
Commissioned before the crisis, this is the official prehistory of the euro. The euro was fashioned as a solution to several related problems with currency and exchange rates that had bedevilled economic co-operation in Europe. Thanks to this lucid, well-organised exposition of the historical record we can now understand more fully the lines of argument and the modes of thought of the officials and political leaders that created, by the late 1980s, an intellectual consensus in favour of the single currency that had not existed 25 years earlier. We can also see the origin of the overoptimism that meant some long-standing problems were not addressed in the early years of the euro but allowed to fester subcutaneously, only to erupt lethally when the global financial crisis hit. This applies, of course, in an extreme way to Ireland but also refers to divergent economic and policy developments in different parts of the euro area more widely.
The salience and value of this book are much greater now than could have been foreseen just a few years ago, with political scientists and economists reassessing the euro project and seeking to pinpoint what has gone wrong and what is needed for the euro 2.0 project to get back on track.
To be sure, the single currency has always had its critics. Many of these have been economists who, “irritated by the intellectual imperfections and flaws that often accompany the compromises implied by any big project”, have acted, in James’s view, as Cassandras. In contrast, he finds political scientists to be “more easygoing characters and tend to the Panglossian”. But the “flaws have a tendency to be exposed at precisely the least propitious moment”. Even within the German policy hierarchy, and even within the Bundesbank, there has often been division and ambiguity on monetary and exchange-rate matters. In 1971, for example, as the postwar dollar-based international system was falling apart, the Bundesbank vice-president Otmar Emminger sided with the Bonn government’s decision to float the Deutschmark, in opposition to his own boss’s wish to stick with a dollar peg.