What next for Europe?

Two years ago, economists were still taking bets on the probability of a euro zone break-up. Today the threat of a currency collapse has receded. The European Union may have seen its legitimacy wither, as evidenced in the recent elections, but somehow the euro currency has pulled through – just.

Unhappy Union: How the euro crisis – and Europe – can be fixed is a timely account of the financial crisis that shook Europe to its core.

Written by two Economist journalists, the book displays the publication’s trademark punchy style, balancing narrative and analysis to present an engaging account of the causes of the euro zone crisis, and its impact on the European project as a whole.

After a useful recap on how the EU developed, Unhappy Union delves into the history of the single currency to establish where things went wrong. It traces the roots of monetary union, from the establishment of the European Monetary System, in 1979, to the Maastricht Treaty, in 1992, showing how French fears of deutschmark domination following the reunification of Germany helped drive the project.

But the flaws of the single currency quickly became apparent. The chief culprit was the Stability and Growth Pact, the system of fiscal monitoring that underpinned the euro.

An initial German requirement that sanctions should be applied to countries that breached the rules was quietly abandoned, and by late 2003 even France and Germany had persuaded the European commission to loosen its targets.

Brewing crisis

While Greece may have dressed up its figures to gain access to the club, the authors point out that the framework of the Stability and Growth Pact was itself ill-conceived. The obsession with deficits blinded people to the real dangers lurking in the euro zone's economy: the build up of private debt; macroeconomic imbalances; and the role of the banking sector. Remarkably, on the eve of the crisis three countries that would soon be bailed out – Ireland, Spain and Cyprus – met the pact's criteria.

Other factors added to the brewing crisis. The perils of a one-size-fits-all interest rate applied to a dozen different countries gradually emerged as the economies of peripheral countries roared ahead, fuelled by easy credit. Cheap money helped countries build up large external balances, while competition from emerging low-cost manufacturing markets such as China hit countries such as Portugal and Italy. The ECB's reluctance to be the lender of last resort was another factor, and Irish commissioner Charlie McCreevy's light-touch regulation is also mentioned.

When the crash came, the EU was ill-prepared. The book recounts how EU leaders lurched from emergency summit to emergency summit in a bid to contain the crisis. It also gives fresh insights into dramatic behind-the-scenes meetings that took place between key players.

As Greece, Ireland and Portugal succumbed to bailouts, the commission began drawing up detailed plans of how to manage a euro break-up.

Turning point

In the end Greece survived. The book pinpoints two turning points in the second half of 2012 that calmed the crisis – German chancellor Angela Merkel’s decision, after her summer break, that Greece would stay in the euro and new ECB president Mario Draghi’s pledge to do “whatever it takes” to preserve the euro, namely through his commitment to the bond-buying programme known as OMT, which succeeded in calming markets without having been used.

Unhappy Europe will not only appeal to those with an interest in the minutiae of the euro zone crisis. Much of the book analyses the impact of the crisis on the European project itself, as well as assessing where Europe now stands.

Among the changes brought about by the financial crisis has been a shift in the balance of power, both among member states – with Germany becoming the reluctant leader and Britain and other non-euro states drifting further away from the core – and the various EU institutions.

The crisis resulted in more power shifting to national governments as states took control of events, alongside the ECB, which the book describes as an “intensely political actor” despite its remote image.

The book argues that the commission has never achieved the pre-eminence it enjoyed under Jacques Delors in the 1980s and rejects the notion that the European Parliament can fill the democratic void between citizens and the EU.

Instead, national parliaments should scrutinise decisions taken by their ministers and prime ministers in Brussels and be given greater powers to veto or modify European legislation.

Other suggestions include greater risk-sharing including the introduction of euro bonds, quicker restructuring of problem sovereign debt (including giving Ireland more time to repay its bailout loans), and a more slimmed down commission – perhaps a system of senior and junior commissioners.

Perhaps by virtue of its brevity Unhappy Union leaves some stones unturned – the EU’s colossal unemployment problem is not explored, for example.

But beneath its rather staid cover is a lively account of the euro zone crisis and a sensible analysis of where Europe should go from here.