What next for Europe?
A lively account of the euro zone crisis also offers a sensible analysis of possible directions for the zone
Crowds gather in front of the GPO on O’Connell Street, in Dublin, in November, 2010, as the country entered the final hours of negotiations for emergency EU and IMF loans aimed at preventing the crisis from spreading to Portugal and Spain and threatening the future of the euro. Photographs: Reuters/Cathal McNaughton
Unhappy Union: How the euro crisis – and Europe – can be fixed
John Peet, Anton LaGuardia
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.
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.