Home truths about Euro crisis

by niamh on January 11, 2013

Jean-Claude Juncker said some remarkably candid things to the European parliament yesterday. His role as the chair of the Eurozone group of countries has given him limited scope to speak freely to date. Indeed he’s someone who is quoted as saying ‘I’m for secret, dark debates‘.

Now that he’s about to step down, he’s made some extremely critical comments about the entire approach the EU has adopted in response to the crisis. Eurointelligence summarizes his ‘furious attack on Berlin’ as follows, noting:

  • that he disagreed with the rhythm of adjustments “imposed on certain countries”, and that the Eurogroup has not made political valuations of the adjustments which too often were just rubber-stamping recommendations by the Commission, ECB and IMF “whose democratic legitimacy is not clear”.that “the choice was made to make the adjustment fall on the weakest”;
  • that certain countries who benefitted from capital flight out of Greece were not doing anything about it;
  • that the mistake has been made to “underestimate the drama of unemployment” and to “give the impression that Europe is only there to punish” and by not rewarding the “program countries” for following through with their adjustment plans;
  • that his successor would be well advised to “listen to all Eurozone members on an equal footing” even if it takes a long time to go through a meeting, or else “we’ll see the results in 6 months if my successor doesn’t”;
  • that the ESM should have “some degree of retroactivity” and be able to “recapitalise banks” and not just address “new problems that may apply in the future”;
  • that the results of the latest European Council were “disappointing”, because “the original idea was to present a road map for the following decades”;
  • in respect of economic policy coordination, that “we can’t carry on with a system where the Frankfurt monetary arm is strong and the economic policy arm is feeble” and “those who refused [in 1997] are now the largest voices calling for this idea”. And “we have to make sure that every time a government recommends a structural reform it is explained to the Eurogroup and that the ministers in charge explain the consequences and others say what the consequences of such reforms will be  on policy in their countries”;
  • “there’s a need for all member states to agree on a ‘minimum social wage'”, a need for “a basis of minimum social rights for workers”, as “otherwise we’re going to lose the support of the working classes”. There’s a need to “agree on the elements of solidarity”, “principle and ways and means of bank resolution”, and “a deposit guarantee scheme”;
  • that the Green party in Luxembourg will vote against the Fiscal Treaty because “they are fed up with what they see as a German diktat”.

I’m especially struck by his recognition that poor coordination and procrastination has resulted in unacceptable costs in the form of unemployment, inequality, and social hardship, because this is where the real human cost of unremitting austerity is felt. Unemployment in the Euro area is now 11.8% – worst of all in Spain and Portugal, where it is over 26%; very serious too in Portugal, Ireland , Latvia and Slovakia. And even these official data conceal a lot: the standardized unemployment rate in Ireland, for example is 14.6%, but there are also a great many under-employed people and discouraged workers who don’t appear in the official statistics.

The end of the Christmas holidays has been a particularly poignant time in Ireland this year. It’s the start of Ireland’s seventh phase of holding the rotating Presidency of the EU, so Dublin is full of Euro-bureaucrats; all the commissioners arrived yesterday. It’s also the start of a year-long government initiative to boost tourism called ‘The Gathering’, which is meant to promote an influx of visitors analogous to Scotland’s ‘Homecoming’ a few years ago. But we’re also seeing large numbers of people leaving, especially young people, and lots of sad friends and families have been saying goodbye. The gathering up and out of a new generation of emigrants, sadly.



Hidari 01.11.13 at 3:19 pm

This is not going to win me any friends, I know that, but what has to happen before we realise that the Euro was a mistake? I mean, apart from what has already happened? How much worse do things have to get before we realise that the gold standard the Euro, all things considered, cannot really be considered to be a triumphant success? I mean will it take a war?


scott 01.11.13 at 3:32 pm

Yeah, I’ve wondered that too with Hidari. It seems that the euro as a monetary and economic matter got presented as (and still is) the symbol of the European project, integration, etc. Which is nice if everything works out, but if it doesn’t and distorts capital flows and results in a crisis that immiserates pretty much everyone except Germany, that would seem to be a mistake that requires correction. I’m an American who doesn’t have anything here that resembles an economic left or even an economic liberal party, but I thought Europe as the home of social democracy would have seen more pushback from its left on a bunch of plutocratic technocrats insisting that misery and starvation are small prices to pay for “Europe.”


christian_h 01.11.13 at 3:38 pm

Of course the Euro was a mistake. (I am angry at myself for getting that totally wrong at the time.) But this is not a recipe for action, merely n observation – because while introducing the Euro was a mistake undoing it now might well compound it with a bigger mistake.


politicalfootball 01.11.13 at 4:19 pm

People often respond to policy failure by saying that we should double down on the failed policy. Austerity fails? We need more austerity! Guns facilitate violence? We need more guns! Military action failing in Iraq and Afghanistan? Surge!

I suppose in the case of the Eurozone, it really is true that one possible answer to the failure of economic integration really would be to get more serious about economic integration. But is there any chance at all that the relevant constituencies are willing to go that route before the Euro falls apart?

That’s a non-rhetorical question. Obviously, the existence of the Euro has cauased/will cause the economic collapse of many member nations – but at least so far, such collapse is not, by itself, enough to cause the collapse of the Euro. Can the Euro really survive long enough that the relevant constituencies will get their act together? I have no idea. Another thing I don’t know: What outcome should we be rooting for?


politicalfootball 01.11.13 at 4:30 pm

I’m especially struck by his recognition that poor coordination and procrastination has resulted in unacceptable costs in the form of unemployment, inequality, and social hardship, because this is where the real human cost of unremitting austerity is felt.

The fact that this is, indeed, a striking acknowledgment demonstrates how detached from reality European elites have been and still are. Not long ago, I would have said that the failure to acknowledge obvious reality would doom the European project. That project has proven a lot more resilient than I expected.


William Timberman 01.11.13 at 4:39 pm

The introduction of the Euro was a gamble, but it’s easy enough to see what was at stake, and why the dice were thrown. I feel some sympathy for those who took that gamble, because I think that the European Union was and is an essential control on the pathological presumptions of U.S. foreign policy which metastasized out of its post-WWII advantages. The European Union has the potential to fill that role more effectively than the Non-Aligned Movement could ever hope to do, and regional alliances like CELAC or UNASUR or ASEAN still look unlikely to do, but only if it makes good on its promise of genuine unification.

Political unification through the back door of the Euro was a fragile idea from the beginning, and events have overwhelmed it. I’m skeptical, to say the least, about Joschka Fischer’s United States of Europe, but at some point something like it will have to be cobbled together. In retrospect, that might have been easier without the Euro gamble, but it almost certainly would have taken longer. Now, along with everyone else, we’ll have to wait and see what happens.

I’d like to think that even after the Euro debacle Europe, and Europeans, haven’t permanently foreclosed their option of closer integration, but that may well turn out to be the case. As Fraau Merkel has already said Scheitert der Euro, dann scheitert Europa. Whatever happens, I wish Europeans well, especially since the lunacy of U.S. financial interests had a great deal to do with pushing the Euro, and perhaps the European Union itself, over the brink.


politicalfootball 01.11.13 at 4:44 pm

especially since the lunacy of U.S. financial interests had a great deal to do with pushing the Euro, and perhaps the European Union itself, over the brink.

Is that really true? I mean, I realize that U.S. financial interests have a lot to answer for, but surely if it hadn’t been this crisis, it would have been some crisis. The Euro, as designed, was destined to fail.


ponce 01.11.13 at 4:45 pm


Jordan Peacock 01.11.13 at 4:53 pm

Or maybe it means relaxing on the economic integration in order to introduce a traversal move toward political integration.

Not saying that’s likely, nor that it would be without its own problems, but the core issue with the Eurozone is that there is a fundamental problem with having economic integration without political integration.

Additionally, there’s an economic argument that Thomas Sargent used in his address after receiving the Nobel Prize in Economics (watch it here: http://www.youtube.com/watch?v=Cl0QYkez-BE) that goes roughly as follows:

The rules of the fiscal union in the US evolved in a distinct sequence. The federal government first developed a robust fiscal capacity, with the assumption of state debt, issuance of federal debt, and access to its own tax revenue. Once that was established, the states could adopt balanced-budget provisions. By introducing strict balanced-budget rules prior to a robust fiscal union – assuming that some of them harbour ambitions for such a union – European policymakers are attempting to reverse this sequencing. Adopting such rules might reassure the ECB and smooth the path for further expansion of its operations, both of which are desirable, but it leaves the Eurozone short in terms of countercyclical tools. (source: http://www.voxeu.org/article/europe-s-fiscal-union-lessons-us-federalism)


mpowell 01.11.13 at 4:57 pm

Whatever happens, I wish Europeans well, especially since the lunacy of U.S. financial interests had a great deal to do with pushing the Euro, and perhaps the European Union itself, over the brink.

This is ridiculous. Eureopeans chose the Euro and now that the predictable problems with it have emerged, they have responded with the worst monetary policy of any monetary union in the world. It’s like blaming the lightning storm when you straw house burns down.

I think if you are going to have a monetary union like the Euro it is important to recognize that there is a balance in what you can strike between your inflation target and how much OMO your central bank will have to engage in during a recession. In the US, OMO are not a problem because there is just one sovereign. In the EU, buying just Spanish debt is unfair to everyone else -> it represents fiscal transfers. So you either buy everyone’s debt (which probably overshoots your targets before you fix Spain) or you have inadequate policy. One possible solution would be a higher inflation target (or higher NGDP target as both would have the same result). A higher target gives you more flexibility to use rates instead of OMO to hit your target. But the Euro is so far away from even this basic discussion it hardly seems relevant. They haven’t even realized that a central bank with half of a mandate (the ECB only actually cares about one side of their inflation target so I won’t even give them credit for a full single mandate) is just not the right place to start monetary policy.


William Timberman 01.11.13 at 5:19 pm

I could probably have been a little clearer in my assertion of a relationship between the U.S. financial crisis and the failure of the Euro. It wasn’t my intention to blame the fundamental flaws in the implementation of the Euro on the financial interests of the U.S., but to suggest that the collapse of Lehman Brothers was one of the triggers which exposed the weaknesses of the Euro which — up to that time at least — had escaped the notice of people who had no vested interest in looking for them.


scott 01.11.13 at 5:52 pm

“Political unification through the back door of the Euro was a fragile idea from the beginning, and events have overwhelmed it.”

That’s my point. I have no quarrel with the ongoing project to further European political unity, but I do have a problem with using something as a Bright Shiny Symbol for political purposes when the inevitable distorting economic effect is to make millions of people poorer. If you want to talk political unity, then talk about it, but don’t use a tool that’s ill-suited to that purpose.


hix 01.11.13 at 5:56 pm

Juncker is now more biased not less, just representing a tiny tax haven instead of the EU as a whole. The same bias applies the public servants of the other tiny tax haven country we have in the EU, Ireland. What a coincidence -_-.


genauer 01.11.13 at 5:58 pm

Some explanations / background information, especially for the American readers:

1. Jean Claude Juncker

Is the mayor of the just 500 000 people statelet Luxemburg. Their dominant business is running shady banks and tax cheating organizations (Briefkastenfirmen). They were on the “grey list” of the G20, and the account of one dictator alone (Kim Jong-Il’s) represents 8000 $ per Luxemburg capita (http://en.wikipedia.org/wiki/Luxembourg). That makes it pretty easy to keep the taxes pretty low. Juncker, as the head of the traditionally largest party runs the mid size township as his personal fiefdom, since 1995. He just needed about 77 343 votes (38.0% of 203 535) (http://en.wikipedia.org/wiki/Politics_of_Luxembourg) for his whole party for that!

In normal countries you are not getting one single seat in parliament with that. But in many European Institutions the vote of the mayor of Luxemburg (also called prime minister) has the same weight as the vote of the German chancellor, Dr. Angela Merkel, who got elected by 11.828.277 + 6.316.080 + 2.830.238 = 20.974.595 voters (http://de.wikipedia.org/wiki/Bundestagswahl_2009), or 271 times more. And since nobody is talking back to him in his township, and he is the undisputed king of the tax cheats, Juncker feels like lecturing the rest of Europe on his idea of running the EU, a club of democracies with decisions taken fly by night, in “dark secret rooms” http://euobserver.com/economic/32222, like Al Capone and Jimmy Hoffa

And Juncker is somewhat frustrated, that the interests of the criminal clients he represents, do not get the same weight as the 1000 times more working people of Europe.

Just plain crazy.

Some additional stuff: http://www.aed.public.lu/actualites/2005/11/05-karussel/index.html


wp200 01.11.13 at 6:16 pm

Just curious, but isn’t it possible to remodel the Euro after the ICU proposed by Keynes? He specifically designed the ICU to prevent unwanted money flows from one country to another leading to unsustainable current account deficits/surpluses.



Mao Cheng Ji 01.11.13 at 6:35 pm

Latvia (as in “very serious too in Portugal, Ireland , Latvia and Slovakia”) doesn’t use Euros. If the problem with Euro is that it makes it difficult to enact protectionist policies by devaluing your currency, then, perhaps, the whole idea of the European Union is bad, because, regardless of currencies used, it deprives member-states of various other tools of protectionism; that’s its whole point, really.


Barry 01.11.13 at 6:38 pm

In short, this [insert loooooooooooooong list of expletives] is now leaving office, and says ‘see ya, wouldn’t want to be ya!’.


Pat 01.11.13 at 7:11 pm

This is not going to win me any friends, I know that, but what has to happen before we realise that the Euro was a mistake?

Hidari, you seem to have a rotten notion of how not to win friends, at least in these quarters.

In an alternate universe, the Euro could have been a really triumphant success—had Mitterand and Kohl’s prophecy of currency union eventually leading to fiscal and monetary union actually come to pass. The structural difficulties seem to me comparatively minor; although few Portuguese speak German and so can’t travel to where the jobs are, etc., an awful lot of Europeans speak at least English, so that’s surmountable. What seems the greater tragedy is that the Germans (i) believe inflation, not depression, brought about Hitler and so insisted the Maastricht treaty only include a price-stability mandate for the ECB and (ii) were promised by Kohl that they would never have to pay the debts of those scurrilous southerners. (i) means no monetary union, and (ii) means no fiscal union, so yeah, what we’re left with is a catastrophic Euro project. Yet if only these things were a little different….

Gelegentlich muss Deutchland Europa in die Haende nehmen und zerreissen, aber diesmal ohne Waffen und mit der Wirtschaftspolitik. Fortschritt, ich nehme an….


genauer 01.11.13 at 7:30 pm

2. Wolfgang Munchau

He was the founding editor-in-chief of the Financial Times Deutschland, which was terminally closed this year. Their weird output was just plain crazy, and the mother Financial Times stopped further horrendous losses from a merry band of folks living in their own little bubble (like Fricke). I claim for myself to read many things from hard core communists to folks at the far right of the US, but those FTD folks were really special lunatic, you just couldn’t look at it anymore.

The speciality of the Baron Wolfgang Münchausen(the famous guy riding on a cannonball and rescuing himself with his shoestrings out of the swamp : – ) is to come up every week with a new idea, how to steal from the German taxpayers. Shrill, but living from catering to some folks in the City of London.

The (working) people of Europe know very well, that the Scandinavian / Dutch/ German way, represented by e.g. the present German Chancellor Merkel, but social democrat Schroeder before was no different, is much better for the normal people, in the long run.

A social market economy, with performance and justice for all. Her credibility / trust in her beats the local incumbent in most countries http://www.pewglobal.org/2012/05/29/chapter-4-views-of-eu-countries-and-leaders/

Those who demand in the name of “solidarity” today in Europe, do not ask for their own poor, but for their rich clients.
Münchau, Junckers, the Governments of Ireland, Greece, Cyprus.

But we will overcome these times of trial. Last year the good people of Estonia joined the Euro, and the Swiss pegged their Franc, next year the good people of Latvia will come, and then we wait politely and patiently for our good neighbors Poland and Czech.

When some bad apples want to leave, let them go.


genauer 01.11.13 at 8:11 pm

I forgot to say, why I mentioned Baron Wolfgang Münchausen. “Eurointelligence” is one of his front operations.

This blog is named after a quote of Immanuel Kant “Out of the crooked timber of humanity no straight thing was ever made.”

Krummes Holz – Aufrechter Gang (Crooked Timber – walking upright) Ernst Bloch, Helmut Gollwitzer. is the present day German answer:

We may be made of crooked timber, but that doesn’t prevent us to walk upright, honest and straight, with dignity. This is what makes us human. It is an eternal struggle toward the better, but we are making progress.


Martin Bento 01.11.13 at 8:43 pm

Perhaps we should entertain the notion that if Europe is not a single nation in the mind of the people, it will not work as a nation economically. Even with fiscal union, people have to be concerned that all parties “pull their own weight”. No one expects Alabama or Mississippi to pull their own weight (though given constant red state braying about welchers ,it is beginning to come up) , and the union would not work if they did. If the Germans are not willing to permanently subsidize the Greeks, maybe the Greeks need to retain a different currency.


John Quiggin 01.11.13 at 8:49 pm

The big disaster in the eurozone has been ECB policy and austerity, not currency union. The UK hasn’t done a lot better with an independent currency and austerity – even though it’s its monetary policy has been a bit better.


Pat 01.11.13 at 8:53 pm

Martin Bento #21, the prominence of Greece’s experience has cheapened the discourse terribly. The Greeks need to go back to the drachma, sure, but that has nothing to do with what should be done about the real question: What is to be done with Spain, Italy, Ireland, Portugal, and (if things get much worse) France? For the Germans to subsidize those countries is a very different question; it needn’t be permanent, and that’s who they’re selling cars to, after all.


Pat 01.11.13 at 8:57 pm

I’d be tempted to agree with John Quiggin, but his use of “it’s” in place of “its” makes him history’s greatest monster.


John Quiggin 01.11.13 at 9:16 pm

@Pat – D’oh! Fortunately, as with other contenders for that title, I can erase the past and rewrite a more acceptable version


Martin Bento 01.11.13 at 9:30 pm

Pat, would it be possible for each state in the US to approximately balance its federal taxes with revenues from the feds? I doubt it. Some areas are lower productivity, and distributing all the high value added jobs evenly would seem very difficult to engineer and certainly not something the market would do. In the US, the market gives us Silicon Valley, and a handful of smaller tech centers – certainly not a software industry in every state. The areas with industries like that are going to be able to generate a lot more tax revenues than farming areas. So do they then get a lot more from the federal (or European) government? If not, it would seem the inequality would get worse. If so, that is subsidy from rich areas to poor ones with no particular end in sight. Subsidy from rich areas to poor ones is what most nations, or at least large ones, have, and it is accepted, but I don’t get the sense that this has ever been accepted in Europe.


Martin Bento 01.11.13 at 9:32 pm

Oops, gotta proofread. Reversed the “if so” and “if not” cases above.


politicalfootball 01.11.13 at 9:38 pm

JQ @ 22: Would Greece, Spain et al have been as foolish as the UK? I’d guess not, but maybe they would. If so, a UK-level of stupidity would still be a considerable improvement over the Euro-required policies their governments have, in fact, imposed.

The UK experience does make a decent, but not dispositive, case that the Germans would be acting just as foolishly – though with less clout – in the absence of the Euro. Still, I do think the Euro creates unfortunate incentives for the Germans to behave badly, and improvements elsewhere in Europe would boost the German economy in spite of German policy.


John Quiggin 01.11.13 at 10:18 pm

@28 Agreed. I was going to write pretty much your second para when I got around to it.


genauer 01.11.13 at 10:52 pm

Martin Bento,

all what happens in the US is based on the respective constitution, and the laws governed by it. Distribution comes through legal common institutions. The budget is decided by the sovereign, parliament.

The financial constitution of the Euro, the Maastricht treaty is perfectly clear: no bailout, no money printing. And it is good, it is just, and it is the only way to organize it , so far.

What enemies of constitution like Münchau want, is to destroy the law and steal from people, who have explicitely not signed up for things the criminals demand now.
Münchau(sen) is not just a little mugger in Harlem at night.


Chaz 01.11.13 at 10:57 pm

John @22,

Britain proves that it’s possible for a monetarily sovereign country to screw itself up just as badly as a union country if it does so on purpose. However Britain at least has the tools to reverse this mistake if and when they elect competent government.

If Spain and Greece decide they want to increase their spending, they will literally run out of money. The ECB could improve its policy somewhat but not enough to actually get Spain and Greece to a “good” economy. That would require grants (or permanent, interest-free loans) to those governments, which are illegal, or heavy stimulus spending in those countries by the EU Government, which does not exist.

To look at it another way, when the crisis hit, center-left parties were in power in Spain and Greece. If they had had their own currencies, would they have walked down the same austerity path? More likely they would have maintained spending and let their currency depreciate.


hix 01.11.13 at 10:57 pm

So what should those countries with huge current account deficits and no industry do to build a competitive goods export industry? How should EU conditions for transfer payments/bailouts look like in your opinon to help the matter? Can we agree that the currenct account surplus countries going on a spending binge wont make them buy Greek cars and Spanish mobile phone?


Alex 01.11.13 at 11:46 pm

Remind me, when did Juncker say any of this before it was decided? Further, why has he been Some Pompous Thing in the EU all my life? He’s always been there, but nobody knows why.


Martin Bento 01.12.13 at 12:27 am

genauer, yes, obviously the US is governed by its laws and the EU by its, but the EUs don’t seem to be working, bailouts seem quite necessary, I think printing money could be all to the good, in the US too, but that is a different discussion. However, the question is does the Maastricht system work? Partly, of course, that depends on work at doing what, but if the intention was not to screw over the bulk of the population, the answer seems to be no. The next question is can it work? I’m questioning whether it will ever be possible that the less productive countries will be able to function in a union like this with the more productive ones without resources being constantly redistributed, and whether Europe has enough of a unified identity for the wealthier countries to consider this just and tolerable.


Shay Begorrah 01.12.13 at 1:18 am

@John Quiggin

The big disaster in the eurozone has been ECB policy and austerity, not currency union. The UK hasn’t done a lot better with an independent currency and austerity – even though it’s its monetary policy has been a bit better.

There is common agreement that the UK’s George Osborn has only survived for so long thanks to the Eurozone making any country with its own currency, even one run by a cadre of upper class twits, seem attractive. Most people in the reality based community also believe that the ECB could hardly have done worse than it has – though Draghi and Asmussen are more pragmatic thugs than Trichet and Bini-Smaghi were.

However knowing what we now do about German political culture (Keynes is considered too left wing by the social democrats!) , is it really possible that a currency union outside of the German bloc could work? German political discussion has become far more comfortable about the justification for economic imperialism (ensuring countries make necessary reforms, painful decisions and so on) and, as you can read above, German opinion on the morally inferior money grabbing nations of Europe has a disturbing ring to it.

Could it be that neoliberalism and currency fetishization are too deeply embedded in German political culture to be removed? Currency union will never work if the largest state is in thrall to this kind of reactionary economic thinking.


JW Mason 01.12.13 at 2:32 am

I will ask the same questions I always ask about the euro crisis:

1. Are the only conflicts along national lines? What if the result of the crisis is a rollback of protective labor market institutions and the social wage, changes that labor opposes but owners of capital support? Shouldn’t we at least consider the possibility that policies that make no sense in terms of boosting output, are in fact aimed at a different goal? (Especially that’s what people making policy say.)

2. What is the basis for the assumption that the current account imbalances in Europe are the result of rising relative costs in the periphery, as opposed to more rapid income growth there compared with Germany? Are we sure that German competitiveness has improved at all during the euro era?

3. Corollary to the above, what is the evidence that floating exchange rates would be sufficient to produce current account balance, either in the counterfactual without the euro or in the future if Greece or others exit? Especially given that Greek was running big trade deficits for decades before the euro?


JW Mason 01.12.13 at 2:51 am

(I should have written trade rather than current account above. The convention of talking about current account balances is a bit misleading when it comes to Greece. The current account includes intergovernmental transfers, which were quite large for Greece in the pre-euro period, resulting in a couple of years of close to — tho never quite — balanced current accounts. But for the questions at hand what is important is the trade balance, which Greece has never come close to balancing. More generally, the world is full of countries with floating exchange rates and balance of payments problems.)


Hidari 01.12.13 at 9:20 am

“The big disaster in the eurozone has been ECB policy and austerity, not currency union. The UK hasn’t done a lot better with an independent currency and austerity – even though it’s its monetary policy has been a bit better.””

Well…..yes and no. The last time this subject was pointed out on CT I pointed out that every currency union in history has failed. Further research has pointed out that this is not actually true, but it is not clear that the successes hold cheering news for Euro enthusiasts. Take for example the Eastern Caribbean Currency Union. Apart from the fact that all the countries involved are all quite small and have small populations they also have very similar cultures and economies (they are mainly ex-colonies of the British Empire). The CFA Franc is closer to the Euro but again the countries all speak the same language and are (so far as I can tell) economically similar. More to the point the CFA has had a rapid turnover in members with many members leaving and rejoining: not an option for the Euro.

Don’t forget that currency unions usually (not always) are euphemisms for imperial control. As Wikipedia points out correctly the UK Pound is a currency union. England invaded Wales and Ireland (and forced Scotland to join by threatening to invaded) and imposed a currency, and when the “colonies” tried to leave the currency union the English killed their citizens ’till they changed their minds. Don’t forget that the failure of the Soviet Union was (amongst other things) the failure of a currency union. When the USSR no longer had the military ability or will to stop countries leaving the Soviet Rouble, they did. (arguably the CFA is also a form of French economic control over ex-colonies).

The US dollar is also of course a currency union and again when the South tried to leave this union the North stopped them militarily. That’s what you really have to do if you are serious about your currency (or else like the CFA you just let people leave and join at will….not an option for the Euro on a large scale). The US spends a lot of time propagandising its citizens (all the worshippng the flag, the biased history taught in schools, the worship of the Constitution)in the ideology of “Americanness” at least partly to ensure that nothing like the Civil War can ever happen again.

Compare that to the Euro. No shared language, little shared culture (European history is mainly the history of the various European powers attacking each other) no shared army or air force or navy and, culturally, little sense of “Europeanness” except amongst elites. Weak, mainly powerless European Government.

It can’t be stressed enough that, with a very few exceptions, most currency unions in history have failed.



Tim Worstall 01.12.13 at 9:49 am

“When the USSR no longer had the military ability or will to stop countries leaving the Soviet Rouble, they did.”

A minor niggle. Other way around.

Upon collapse of the USSR each of the constituent republics had their own rouble printing press. Which, obviously, every government used: the benefits of being able to pay the wages were more local than the system wide inflation that followed.

It was Russia that left the Soviet rouble…..

Entirely trivial point but….


Tim Worstall 01.12.13 at 9:50 am

Paging Dr. Mundell.

If the EU isn’t anywhere close to being an optimal currency area then it shouldn’t be a currency area.

But of course that’s the sort of thinking that the loons, fruitcakes and closet racists in UKIP are rightly condemned for.


bert 01.12.13 at 12:50 pm

Are Neil and Christine Hamilton going to be inserted at the top of your list for the European Parliament elections?
It really is the white-collar BNP.

I think I’ve mentioned Bernard Connolly before, the economist who resigned from the European Commission to publish a book on optimal currency areas, the flaws of the euro plan, the dangers of German dominance and the risks of another european war.
I don’t think I mentioned that he moved back to London and took a job with AIG Financial Products. Almost too good to be true, that. But true.


P O'Neill 01.12.13 at 3:28 pm

While currency unions may not be much fun to be in, especially on the periphery, the breakup of currency unions is no picnic either.


Shay Begorrah 01.12.13 at 4:18 pm

P O’Neil @42

The author of that piece would be Anders Aslund, unrepentant uberneoliberal and advocate of shock therapy, and he is a remarkably good voice to ignore.

As an example he wrote following article which went beyond courting controversy and into outright dishonesty.


He is up there with Cochrane in his wrongness about everything.


Alex 01.12.13 at 5:16 pm

when the “colonies” tried to leave the currency union the English** killed their citizens ’till they changed their minds

This isn’t actually true, is it? I can’t think of a colony that tried to “leave the currency union”; out of the ones that left the empire, most of those actually stayed in the sterling area for many years after leaving (India and Nigeria up to 1976). Further, several of the colonies (Australia, New Zealand) issued their own currency within the empire. Canada was in the empire, with its own currency, and wasn’t in the sterling area*. The Republic of Ireland remained in many ways in a monetary-policy union (if not a common currency – rather like Holland and Germany in the 1980s) with the UK until it joined the Euro. Hong Kong had its own currency and very distinctive monetary policy (a currency-board based on US$) right up to 1997.

*During WW2 and postwar reconstruction, UK imports from Canada were subject to the same dollar-saving restrictions as ones from the US.
** it is well known that Scotsmen, Welshmen, and Irishmen were not allowed to leave the country from 1498 to 1968, and therefore took no part in the empire.


genauer 01.12.13 at 5:29 pm

Chaz @ 31

Spain and Greece can increase their spending, as long as they find people buying their bonds. That is how the ECB is constructed, right from the beginning, and for very good reason.

After we got the ESM ready for firing, the criminals / hedgies now know that we can destroy them. MF Global went bankrupt, Paulson lost half, and Soros seems to be in significant pain, given his hysterical media utterings. Good : – ) Suddenly Spain can borrow for 2.1 % (negative after inflation and tax) for a 2 years maturity on the market, and Italy for 1.3%.

Ireland can borrow at 3.1% over 5 years, on the market, better than the IMF conditions. To service their significant debt they have to pay about 1.5% GDP interest after inflation, and some additional 2% reduction of the principal, according to the fiscal pact underlying the ESM. That leaves them with an about 7 % higher living standard than the average Euro people, they owe the money. “Unbearable suffering” looks different to me.

Ireland, Greece, Spain got lavish grants from the EU over the last 30 years, to the sum of 100% GDP, or 20 Marshall plans. Please see http://www.money-go-round.eu/Country.aspx?id=IE&year=2011&method=gdp
That apparently gave some of them the idea they can stay as client states forever (@ 26).

Martin Bento @ 34

Maastricht is working, in the moment we would use the central bank to distribute money by reason of brinkmanship, it would fail for sure.
It just doesn’t work to spend always more than you earn, and then solve the problem with the printing press. But this was well known at the time they signed up to the Euro. That is the reason, why they enjoyed low interest rates after that.
The income differences within the US are actually pretty comparable to the EU. There is nowhere a right to same wage.

Shay Begorrah @ 35

You are calling Draghi and Asmussen thugs? You are constantly making deeply criminal demands to break treaty and law, in order to steal from me.

And when I insist to keep what is rightfully mine, you call it imperialism. Why don’t you go back to Teheran, where your kind of thinking seems to be in tune with those in power. You are already signing from their hymn sheet anyways.

In Germany we believe in evidence, and not Keynes ideology.

We have already tried the following “Stimulus programs”

What did we try in Germany: ?
Science push
1-Euro Job

What stays: Kurzarbeit, Arbeitszeitkonten

There is nothing new about people trying to “smooth out consumption” and always forgetting to then reduce the deficits during the good times.

JW Mason @ 36, 37

To have a negative Current Account on a constant basis is OK, if this is returning diaspora money, and very fruitfully invested, like in Australia, and there are some concerns too, that it shouldn’t be too much. In Greece however all that went into consumption, and mostly on credit, which is difficult to see, when people fudge the books systematically.

Poland and Czech have negative CAs too, without being seen as a problem.

The cumulative CA of Germany was actually slightly negative as late as 2003.

Tim Worstall @ 40

I learned first about Mundell, when I looked at FX exchange rates and CA surpluses, and made sense out of them. At some point I thought, other people have thought about it before, lets have a look. I got a book, implemented the Fleming-Mundell model and then looked for some data to calibrate it. Doesn’t seem to exist, but if you can show me, where people ever tried to use Mundell with real data, I would be very interested.

Until then I believe, that currency unions work when there is a political will to that.

Austria ran for decades a 7:1 currency peg, without ANY formal ties to Germany.

bert @ 41

Nobody was forced to join the Euro, to the contrary, countries had to be for many years in various convergency schemes before it. Denmark and Sweden stayed out. Nobody is forced to stay.

The problem we have is the constant racist slander against Germany from people like you.

And as long as the good people, who left the ruble union for good, are very eager to join Germany in the Euro Union, I feel pretty confident. Shouldn’t they be much more afraid of the “German Diktat”?

Well, this has gotten way too long and will not happen again


Tim Worstall 01.12.13 at 7:11 pm

“Are Neil and Christine Hamilton going to be inserted at the top of your list for the European Parliament elections?”

I most certainly hope not.


hix 01.12.13 at 7:21 pm

“the dangers of German dominance and the risks of another european war.

A Brit doing racist rants about the dangers of German dominance and how they could cause a war, now that is something new.


bert 01.12.13 at 7:25 pm

There was an unpleasant flap over Christmas involving Marta Andreasen, Tim.
Neil Hamilton responded by threatening a libel suit, via email.
Thus reminding everyone that as well as being a complete prat he is also a sinister creep.


bert 01.12.13 at 7:29 pm

It’s a strange book, hix.
The economics parts, which make up most of the text, are measured and quite dry. Then there’s a bloodcurdling section about how we may be plunged into a new dark age. I got the strong impression it was added at the suggestion of his publishers.


niamh 01.12.13 at 10:27 pm

Genauer, I am perfectly happy for you to express your views on CT and to disagree with anyone you like. But please refrain from gratuitous insults.

The point about Juncker’s comments, it seems to me, is the recognition that there are different options in the way the crisis can be addressed. Past design shapes current options. The Euro didn’t have to evolve quite as it did (cf Harold James’s new book on The Making of European Monetary Union). The costs of adjustment now could be distributed in a variety of ways; the political institutions and the political ideas shaping shaping developments into the future are precisely what’s in contention.

I do not agree that the ECB’s acceptance of a broader range of policy measures in order to secure its mandate of overall financial stability amounts to robbing anyone. Moreover, securing financial stability is crucial, but by itself it’s only one measure of economic performance. If it comes at the expense of imposing long-term hardship and the marginalization of democratic participation, it’s going to be unstable as well as unjust.

Of course Germany has made massive adjustments over the last 20 years. But there’s something odd about the claim that in the context of increasing interdependence, one country’s model must be the template for all, or that Germany’s mode of adjustment can be understood independently of its relationships with other countries.


Tim Worstall 01.12.13 at 10:47 pm

“There was an unpleasant flap over Christmas involving Marta Andreasen, Tim.
Neil Hamilton responded by threatening a libel suit, via email.”

I’m well aware of all that. I’m possibly the only CT commenter who has met both of them as well. I’m certainly the only CT commenter (indeed, the only person ever) who has ghosted a Marta piece for the Daily Sport. Something I hope makes it into any obituary I might gain. That I pretended to be a middle aged female Spanish accountant in that fine newspaper. I may well be the only person around here to have been name checked in a Neil Hamilton column as well. Which I may or may not hope reaches that obit.

I have to admit that the story sounded a bit odd to me. Well, obviously, it sounded odd to everyone. But knowing the internal details of candidate selection as I do it sounded even odder. Unless they’ve changed the rules dramatically the centre just doesn’t have the power to determine who is either on or heads the lists.

As to this: “It really is the white-collar BNP.” A bit liberal with the actualite there. the part of it that I’ve been involved with (and historically, responsible for some of the current policies) is the basic economic stance. Which is about as different from the BNP’s as it is possible to be.


bert 01.12.13 at 11:25 pm

Then I should explain.
As with the BNP, for a shitty little protest party such as UKIP the European Parliament is where the gravy train is.

Marta was wrong when she said things were being run in a totalitarian way, was she?
You’ve got the ‘kipper inside track, I give you that. And I must say I’d find it astonishing if anyone inside the Farage camp thought it a good idea to get Hamilton stink on themselves. But this is a party that made Lord Pearson its leader so I suppose anything can happen.


genauer 01.13.13 at 12:13 pm

Niamh, I am perfectly aware that this is your blog.

But there are also simple facts.

My dictionary spells “gratuitiously” as “unnecessary, without reason”

Shay Begorrah insulting the Gentlemen Draghi and Asmussen certainly fits that description, but that doesn’t seem to be your problem.

They do their duty within the mandate of the treaty, and are actually bending over backwards to find creative solutions to help people out of their self inflicted credibility problems. These people should be very grateful for LTRO and ESM, which for many people from AAA countries already go too far.

The numerous demands by people like Shay, to break the Maastricht treaty, without treaty change, the written consent of all sovereigns involved, is a severe anti-constitutional CRIME. Not only many people in blogs, the majority of economics professors running them, but also members of several European governments speak very openly about their intent to not repay the extremely generous loans, they got from the people of Europe or want to get in the near future. Here around we use the word “steal” for such behavior. I brought the numerical example for Ireland above.

I find it very NECESSARY to point out, that we will not accept that. The rules of the Maastricht treaty are as they are, not by accident or negligence, but FOR VERY GOOD REASON, and the behavior of several of our neighbor countries in the last few years have removed any doubt about that. To change the rules, you have to get a majority in the Bundestag. Good luck with that. Our communists, under their cutie leader Sahra Wagenknecht, btw a freshly minted economics PhD, are opposing even the ESM.

Countries lost their access to the credit market, because their continued behavior caused creditors, especially their own people, to lose confidence that it will be paid back. You know that I can fill many pages with all the dishonesties and trickeries of folks like Berlusconi, Papandreou, etc. A very sad thing to say, but we have to face this reality. The strings the ESM can and will attach, restore the necessary confidence, to an actually very remarkable degree.

The activation ESM removed the “emergency” pretext for such attempts, and it was very telling how certain people tried to topple the liability limits, before the German Supreme Court put an end to that, and secured the fiscal prerogative of the sovereign.

When you look at “massive adjustments”, you should actually take a closer look at the other AAA countries in the Euro: Finland, Dutch, to a lesser degree Austria, and the Swedish. All of them have gone since 1990 through mostly more (relative to Germany) painful adjustments, without the generous help of neighbors.

What unites all of them is the determination, to keep to sustainable budgets and to find social consensus over how the cake is distributed. This is not just one country, Germany, but all AAAs.

In case I missed something, where you feel I formulated incorrectly or inappropriately, I would like you to be more specific.


Zamfir 01.13.13 at 1:47 pm

Of course Germany has made massive adjustments over the last 20 years. But there’s something odd about the claim that in the context of increasing interdependence, one country’s model must be the template for all, or that Germany’s mode of adjustment can be understood independently of its relationships with other countries.

Odd, but also part of the deal, wasn’t it? The eurozone was supposed to operate fairly German-like. That was a condition for reluctant Germany and its allies to join, but also a large part of the attraction for other countries to join.

Germany’s mode of adjustment was supposed to work better in the long run, and countries with more devaluation-based modes wanted to move that way.


Stephen 01.13.13 at 2:09 pm

Hidari@38: ” England invaded Wales and Ireland (and forced Scotland to join by threatening to invaded) and imposed a currency” .

A slightly more nuanced version would be:
The Norman kings who had invaded England also conquered Wales. There was no Welsh currency for them to replace: pre-conquest Wales had almost no native coinage (there is one 10th-century example), and relied on English silver and Welsh cattle as media of exchange. See http://projects.exeter.ac.uk/RDavies/arian/welsh.html.

Later, a Norman/Welsh force invaded Ireland, for centuries a source of slave raids directed at the Welsh and English coasts. There was no Irish currency for them to replace. Pre-conquest Ireland, or at least the Hiberno-Norse of Dublin,had issued copies of the English silver coins of Aethelred II, starting with good money in about 995, deteriorating rapidly, and giving up before the conquest. See http://www.irishcoinage.com/HIBERNO.HTM.

The personal union of England and Scotland, under James I and VI (which had nothing whatever to do with a threatened invasion of Scotland) resulted in coins being struck that were the same both sides of the border. The political union under Anne, which established English-pattern and English-vale coins throughout, at a rate of £1 English = £13 Scots, was likewise not effected by threats of invasion; rather, by massive bribery, with the English agreeing to pay an enormous amount to recompense the Scots investors who had ruined themselves in the Darien scheme, intended to ruin English trade. See http://special.lib.gla.ac.uk/exhibns/month/may2005.html.


Tim Worstall 01.13.13 at 2:38 pm

“As with the BNP, for a shitty little protest party such as UKIP the European Parliament is where the gravy train is. ”

Quite. As the Greens found out too: it’s a function of that first past the post system.


Hidari 01.13.13 at 4:52 pm

” The political union under Anne, which established English-pattern and English-vale coins throughout, at a rate of £1 English = £13 Scots, was likewise not effected by threats of invasion; ”

That’s a very commonly believed piece of pro-English imperial propaganda. Unfortunately it is completely false.

“Sir John Clerk of Penicuik was in a good position to judge as a key figure in
the Scottish administration at the time of the Union with particular
responsibility for financial and trade policy. He was at first reluctant to accept
appointment as one of the Scottish Commissioners for the Union Treaty
because he knew that the great majority of the Scottish people were opposed
to it. He complied because his patron, Queensberry, threatened to withdraw
all support from him. Perhaps for this reason, he seems to have felt a
compulsion during the rest of his life to justify his part in the affair. He spent
years writing a History of the Union in Latin. In 1730 he wrote a paper on
its effects, Observations upon the Present Circumstances of Scotland, and
in 1744 a Testamentary Memorial for his children and friends.
In all of these, he frankly admits that the Union was accepted by the Scottish
Parliament only because the alternative was an English invasion and ‘in the end the whole country would fall under the Dominion of England by right of conquest. …. England wou’d never allow us to grow rich and powerful in a separate state’. For these reasons, ‘the Articles were confirmed in the
Parliament of Scotland contrary to the inclinations of at least three-fourth of
the Kingdom.’ In his History he said that ‘not even 1% of the people

I’m not going to enter into any more debate about this btw. I know that “everyone” knows that the threat of invasion had nothing to do with Scotland surrendering her sovereignty. “Everyone” is wrong.

As for the rest I’m sure what you say is true but it hardly affects my point does it?




bert 01.13.13 at 6:23 pm

The Greens have an MP in Westminster, Tim.
Unlike UKIP. Or the BNP.
But I take your point about first past the post.
Proportional lists, and the opportunities for patronage they provide, are part of the reason Italy’s politics were so widely admired for so many years.


bert 01.13.13 at 6:40 pm

Although thinking about it, you may be talking about the effect of FPTP on election results. I may be talking about the effect of constituency-based selection (as opposed to a centrally drawn up list) on the incentives that those selected are then subject to.

What I think we’re likely to agree on is that there’s room for improvement in the EP elections system. We have a kind of hybrid system for candidate selection and vote allocation (in the UK at least – I’d need to look up how EP elections are run elsewhere). The size of the EP constituencies and the invisibility of the MEPs are two important reasons why this works far less well than it should.


genauer 01.13.13 at 7:18 pm


Basically, according to Reinhart / Rogoff, we have just 2 surviving currency (unions) over more than 150 years without default or huge inflation (Or does anybody have some examples?). The British pound for about 500 years and the US Dollar for about 220 years. The latter was held together with outright civil war, the former with the very credible threat of it, as I learned here.

This is not an option for Europe.

And both are running huge deficits for consumption now, as never before.

The mentality differences are not going away. They want more “solidarity” somehow, and I am angry that they want to pick my pocket via the central bank.

From Schäuble I hear just “more muddle through” http://www.faz.net/aktuell/wirtschaft/wirtschaftspolitik/rede-von-wolfgang-schaeuble-institutioneller-wandel-und-europaeische-einigung-12021794.html

Does somebody have a comment about the Colin Crouch mentioned?

150 years ago, the French also tried a Latin Monetary Union, which didn’t work either.
Maybe it is better, if some folks, who can not live with the rules, are just leaving the Euro.


Stephen 01.13.13 at 7:43 pm

Hidari@57: The Vietnam Exit Strategy – declare we’ve won, and get out – didn’t work politically, and it won’t work for you in debate either. Saying “I’m not going to enter into any more debate about this”, after one response to your post, is not impressive. I expect you’ll read this, even if you don’t reply. So:

Saying “what you say is true but it hardly affects my point does it?” is reasonable only if you disregard my having shown that your points about Wales and Ireland are entirely untrue.

Quoting what Sir John Clerk of Pennycuik said about the Act of Union between the Kingdoms of England and Scotland, 25 or 34 years after the event – which happened when he was aged only 29, and had been a member of the Parliament for Scotland for less than three years – is not exactly a contemporary or reliable account. Even as it is, you will note that he didn’t say the English were threatening to invade, only that in the end an independent Scotland might be invaded by the English. Or maybe not. You may also note that shortly after the Union, he was appointed to the dignified and lucrative position of Baron of the Scottish Exchequer, which caused many of his compatriots to suspect he had been bribed to vote for Union. You seem to have missed my point that the Union was much assisted by the delivery from England of £5,174,000 Scots – an enormous sum, in those days, to a barren and near-bankrupt nation – to deliver them from the consequences of their Darien folly.

But to return to the original point: I’m glad we agree the Euro was an appalling mistake.


Hidari 01.13.13 at 7:58 pm

“The Vietnam Exit Strategy” did, in fact, work politically, and it will also work here.



gastro george 01.13.13 at 8:28 pm


A question. Is Wales, as part of the UK “monetary union”, also running a “huge deficit for consumption”? And, if so, how is that different from, for example, Spain and the EMU. And what lessons should we draw from that?


Bruce Wilder 01.13.13 at 8:36 pm

genauer: “Maybe it is better, if some folks, who can not live with the rules, are just leaving the Euro.”

Expelling Germany from the Eurozone doesn’t really seem to be on anyone’s options list, although it would relieve a lot of the political pressure to do crazy, destructive things to destroy the social contract in periphery countries. I suppose the pressure comes, ultimately, from the corrupt financial sector, but Germany channels it like a medium channels dead souls.


genauer 01.13.13 at 9:05 pm


I dont know much about the internals of UK beyond that some Scots want independence, and that many Englanders say, that they subsidize the rest.
I have no clue, how you divvy up the spoils.

To clarify the “consumption”: Both the US and UK ran up huge debt in the course of winning wars (UK 250% GDP in 1812, WWII). That meants, the huge government deficits turned into surplus and rising living standards after the end of the wars.

The present situation is very different.

@ Bruce

that some folks do again in the future their owned preferred deficit / inflation thing, does not mean that the majority, which is happy with the rules, can not stick together. Estonia joined, Latvia will join, and as soon as the mess is clarified, Poland is interested too. Maybe, with Schwarzenberg, the Czechs too.

Quite frankly, I don’t want to have common accounts or business with people who believe in mediums.


Agog 01.13.13 at 10:03 pm

Pardon me for butting in, but “imposing a currency” on a group of people doesn’t need to involve the replacement of an existing one. And if there had been no established local currency, the imposition of one shouldn’t be thought of as a benevolent act (at least not simply one). Think about the attendant tax obligations, and maybe google “hut tax” for an illustration.


Tim Worstall 01.14.13 at 9:05 am

“I may be talking about the effect of constituency-based selection (as opposed to a centrally drawn up list) on the incentives that those selected are then subject to.”

Indeed: and when I went through it the UKIP selection method was first, get accepted as a candidate at all (centrally). Then each region has hustings. Where you are on the list depends entirely on how many votes from party members in that region you get.

Other parties do it different ways. Tories put sitting MEPs on the top of the list by right.

Comments on this entry are closed.