The Euro

"Why, you might have asked, did I dare to suggest a heavy 1,000-page tome of dense economics? The answer is that this is a marvellous compendium of conventional economic wisdom. It was assembled out of a conference held by the European Commission in late 2007. It neatly summarises what economists think we know, or thought we knew, about the euro. There’s lots of good stuff about the benefits the euro conferred on Europe – the impetus it lent to financial integration and financial deepening, for example. It shows how countries adopting the euro felt pressure to undertake product and labour market reforms. The authors go on for 1,000-plus pages, and yet there’s not a single mention of the kind of dangers that developed at the end of 2009. This is a striking reminder that no one really anticipated the crisis that broke out subsequently. It’s a reminder of how intellectually unprepared we all were. I have a chapter in the book, so I do not exclude myself! True enough, but the book is not entirely Panglossian. Some of the contributors are seriously critical of the Stability Pact. They’re seriously critical that labour markets are not more flexible. There’s a big long agenda of things that Europe must do in order to make the euro area function more smoothly. But there’s no sense that everything is about to crash. It’s as if Europe has purchased a shiny new car that just needs a tune-up. There’s absolutely no sense that the vehicle is about to break down, which is precisely what happened at exactly the time when the book was published. The euro area has shiny coins, elegant bank notes and a tolerably good central bank, but lacks the other elements of a working monetary union, from common bank regulation and resolution to fiscal and political integration. The idea was that the missing elements would be added gradually, over a period of decades. Inconveniently, Europe was then sideswiped – to stick with the car-crash metaphor – by the global financial crisis. As a result, a process that was designed to be completed over a period of decades was forcibly telescoped into a few years. Could the crash have been avoided, you may ask. This specific crash, perhaps, had the subprime crisis in the US been avoided. But just around the next curve would have been another obstruction in the road, resulting in another car crash – maybe not quite as devastating as the one that in fact occurred, but damaging nonetheless."