A March of Folly

Ashoka Mody - EuroTragedy: A Drama in Nine Acts

National Review, July 26, 2018 (August 13, 2018 issue)

Near the beginning of his convincing, readable, and satisfactorily acid account of the rise and who-knows-what-now of the euro, Ashoka Mody cites basic monetary theory and grumbles that the European Union’s leaders “should have been aware that a single currency could not [by itself] deliver . . . prosperity.”

The EU owes its existence to the notion that Europe should avoid repeating the catastrophes of its 20th-century past. Yet by imposing a single currency on a large number of very different countries, it was blending elements of two lesser disasters — fixed exchange rates and central planning — into a combination that history (and some distinguished Cassandras) suggested would end very badly indeed.

No matter. Political ambition trumped economic risk on grounds that fail to persuade Mody. After all, the economic tensions built into a shared currency of such scope were more likely to divide than unite. But Mody overlooks the centrality of the three words “ever closer union” in the preamble to the 1957 treaty that paved the way to the EU. They set the course of the European project in only one direction — forward. To Brussels and its allies, the key attribute of monetary union was that it threw away the key: There was no easy way to check out. Under the circumstances, the governments signing up for the new currency should have paid more attention to flaws in its design that added to its already considerable risks. Perhaps most dangerously, in the absence of political support for a fiscal union to act as a safety net, the euro was launched without one. Once again, no matter: If a crisis developed, it would, enough of the right people evidently believed, overwhelm opposition to that fiscal union. The ratchet of integration would turn again.

This was not a novel idea. When the single currency was first formally proposed back in 1970, “falling forward” was to be “its guiding philosophy,” Mody writes. “Crises would make Europeans more determined to move forward. . . . Europe would emerge stronger and more vibrant.” This cynical strategy has worked well for Brussels in other areas, but, with the single currency, it was pushed too far. The EU emerged neither stronger nor more vibrant, but hobbled, embittered, and lopsided.

Mody, an economist and a visiting professor at Princeton, has worked at the World Bank and the International Monetary Fund. At the latter, his role included acting as a deputy director of its European Department, and he was responsible for the Fund’s relationship with Ireland during its euro-zone nadir. He is thus well equipped to describe the euro’s curious political and intellectually indefensible origins, as well as the new currency’s grubby gestation, the bubble the euro facilitated, and the bust that came close enough to breaking the euro zone apart. Mody recounts how the currency union was held together, before turning his attention to a recovery that may be no more than the calm between storms. Overall, he tells a tale of warnings ignored, of groupthink, of deception and denial, of both recklessness and an excess of caution, of myth, magical thinking, and technocratic illusion — and of reality’s relentless revenge.

For all Mody’s meticulous chronicling of events, he has room for broader themes too. These include a sustained attack — not without cause — on the German-led fixation on budgetary targets and, in particular, an overly emphatic insistence on “austerity” as the cure for the euro zone’s troubles. It is not an endorsement of fiscal profligacy to argue that, in certain cases, the screw was turned too tightly too soon. Compelling Greece, in essence, to try to deflate its way back to better days was already to ask a great deal. To be sure, the Baltic states (by then de facto members of the currency union) managed to do just that. But there were specific reasons that they could, just as there were specific reasons that Greece could not. And these were distinctions that could not be given the recognition they deserved, thanks to a one-size-fits-all financial regime that was taken far further in the euro zone — and, after the crisis erupted, applied more harshly — than sharing a currency would already necessarily imply. 

To understand why Berlin wanted the purse strings kept drawn so tight it is necessary to examine what lay behind what at first seems like purely habitual stinginess. Of course, it is unsurprising that German politicians thought that their successful homegrown model — a degree of frugality — was the right one to follow, but there was more to it than that. Berlin simply had no confidence that its partners (notably those in the south of the euro zone) had the willingness or ability to run their finances appropriately, a concern that Mody might have stressed more. This lack of trust may or may not have been merited, but it was a symptom of a monetary union flung together without enough regard for the psychological or political readiness of its member states for such a step. Even the requirement (reflected in the Maastricht Treaty) that they should converge economically turned out to be a joke, at best largely meaningless, at worst a sham.

Germany’s leadership was also nervous about the consequences of their voters’ having to pick up the tab for a currency union they had never wanted, a bill their politicians had assured them they would never have to pay. Mody is clearly conscious of these issues and, pointing to America’s experience during the Great Depression, highlights the fact that the U.S. government had both the “legitimate political authority and the concurrence of sufficient numbers of the country’s citizens” it needed to help struggling states. It still has. Its counterparts in Germany (and the euro zone’s other “creditor” nations) had scant justification for claiming that they had either. There was one other vital distinction: Americans were being asked to help their compatriots. Notwithstanding grand proclamations of a shared EU “citizenship,” the tie between Michigan and Missouri is infinitely more binding than that between Germany and Greece.

Meanwhile, the stakes for countries beyond Germany — especially in the euro zone’s hardest-hit nations — were raised by the legacy of Berlin’s stipulation that the European Central Bank (ECB), like the Bundesbank before it, should (at least nominally) be free of political interference and, unlike the Federal Reserve (which also has to foster employment), focus solely on price stability. That can work, as it did in Germany (where memories of Weimar’s inflation linger), with sufficient popular consent, but, in countries where that consent does not exist, it can be an invitation to radicalization when tough times come calling — and they did come calling. That invitation was made even easier to accept by the way that the unaccountability of the ECB is reinforced — as Mody demonstrates in some of the most disturbing passages in a frequently disturbing book — by the EU’s high-handedly technocratic ethos. It is an essentially post-democratic approach, and as Mody (without resorting to that adjective) shows, it bears no small part of the blame for the euro-zone fiasco.

The effects of this ruinous monetary experiment have not been confined to political radicalization (a phenomenon not reserved to the euro zone’s weaklings) or the stirring up of antagonism between the nations it was designed to bring closer together. The currency union’s laggards have suffered immense economic harm, and the damage, warns Mody, to their potential for growth may endure long after the current trauma has receded. This implies that the chance of genuine economic convergence within the euro zone — never much of a likelihood despite all the promises — will slip even further out of reach. The natural tendency of a currency union to draw economic activity away from its periphery (a topic discussed by Joseph Stiglitz in his 2016 book on the euro) could make matters worse still — not a pretty prospect when that periphery includes entire nations.

The euro-zone drama still has a long way to run. Some months after Mody’s manuscript went to press, a coalition government of populist Right and (sort of; it’s hard to explain) populist Left, with a suspicion of the euro and a distaste for Teutonic austerity in common, took office in Italy. Much larger than Greece, Italy is, Mody contends, the “eurozone’s fault line.” He may well be correct, but don’t expect a cataclysm quite yet. The most impressive thing about this misbegotten currency union is the political will to keep it in one piece.

Mody himself peers into the future towards the end of the book. One supposedly brighter vision features debt forgiveness, a loosening of the euro zone’s fiscal fetters, improved sovereign-bond issuance, and standard panaceas from education to technology. Much more intriguing is a suggestion tucked away in Mody’s description of a (more plausible) downbeat scenario in which, broadly, those steering the currency union do little to change course.

Amid dark talk of sluggish growth and vulnerability to new shocks — not to mention the cascading defaults that could follow an Italian exit from the euro zone — Mody floats the happier alternative that Germany might either readopt the deutschmark or form a new currency bloc with other like-minded “northern” countries. Meanwhile, those states remaining in the old euro zone would still be able to repay their debts in euros, thereby dodging default while benefiting from the increased competitiveness created by a currency that would undoubtedly devalue sharply once the virtuous had left the picture.

Put another way, the best way out of the euro-zone mess remains, as it has been for years, partition. Such a move, however, would represent more than a few steps backwards in what is meant to be a perpetually forward march.

And that would never do.