The Euro and the Battle of Ideas

by Markus Brunnermeier, Harold James, Jean-Pierre Landau

Why is Europe's great monetary endeavor, the Euro, in trouble? A string of economic difficulties in Greece, Ireland, Spain, Italy, and other Eurozone nations has left observers wondering whether the currency union can survive. In this book, Markus Brunnermeier, Harold James, and Jean-Pierre Landau argue that the core problem with the Euro lies in the philosophical differences between the founding countries of the Eurozone, particularly Germany and France. But the authors also show how these seemingly incompatible differences can be reconciled to ensure Europe's survival.

As the authors demonstrate, Germany, a federal state with strong regional governments, saw the Maastricht Treaty, the framework for the Euro, as a set of rules. France, on the other hand, with a more centralized system of government, saw the framework as flexible, to be overseen by governments. The authors discuss how the troubles faced by the Euro have led its member states to focus on national, as opposed to collective, responses, a reaction explained by the resurgence of the battle of economic ideas: rules vs. discretion, liability vs. solidarity, solvency vs. liquidity, austerity vs. stimulus.

Weaving together economic analysis and historical reflection, The Euro and the Battle of Ideas provides a forensic investigation and a road map for Europe's future.

Genres: Economics, Politics, Finance, Nonfiction, History

448 pages, Hardcover

First published September 13, 2016

Reviews

[Athan Tolis · Rating 5 out of 5]

I’ve read books about the Euro crisis by Soros, Pisani-Ferry, Sandbu, Galbraith Jr., Stiglitz, Papaconstantinou and others. I’ve read many more that dedicate at least a chapter to it, from heavyweight authors like Alan Blinder and Mervyn King and from lightweights too.

I’ve also read more specific books, for example about the Greek crisis. Among those I really enjoyed Paleologos’ effort; Manolopoulos quotes me, even!

“The Euro and the Battle of Ideas” is not my favorite (that would have to be Martin Sandbu’s “Europe’s Orphan”) but it is very comfortably the best. Nothing comes close, actually.

It is what I’d call a “second year course” in understanding the EUR. So, you know, if you’ve gotten your optimal currency area stuff down, if you understand the austerity debate, if you’ve read one of the narratives (I enjoyed Papaconstantinou’s) and you want more, you’ve come to the right place. In fact, you do not need to have been introduced to the topic. It really is all here. Everything.

Also, because this book has enjoyed the full access to and support from the establishment (read the “Acknowledgements” and you’ll see what I mean), there’s tons of stuff that’s not said directly here, but is very clearly written between the lines. You read it, you absorb it, you go to bed, you wake up in the morning and you’re like “aha, that’s what that means.”

Finally, while the authors have a very strong bias (they all want Europe to work) they have strained every sinew to leave it out of the book and have made an extremely deliberate effort to present every single issue from both angles. Then they let go in the short conclusion, which consists of their (rambling and hopeful) suggestion that we need to get together and fix all the problems at the same time, in violation of the “one crisis at a time” process that they describe in the first section of the book.

To get things going, a good hundred pages are first dedicated to the historical, micro-economic and macro-economic background of the Franco-German relationship that lies at the center of the project and the solution that was devised post-war to keep the two together: the “Monnet process” whereby we move forward and let the project become the sum of the solutions that are necessary to resolve the inevitable crises.

Next comes an introduction to a more recent process: that of collective decision making giving way mid-crisis to decision making at the national level, giving way to the French and the Germans deciding everything amongst them upfront and ultimately leading to Germany deciding everything.

“That’s nice,” I thought to myself, “but it’s descriptive, what did I learn here?” The answer is evident, but the authors cannot put it in print: there cannot be an equal union between big powerful countries and small countries. It is a quid pro quo. The small countries are the ones who enjoy the more secure borders and the better terms of trade that come from associating with the big ones. But when the you-know-what hits the fan, it’s the big guys who call the shots. Period. Unless you move to the United States of Europe (which ain’t happening) that’s the deal and if you don’t like it, “there’s the door.” In times of trouble, the Commission’s job is to discuss fisheries. E basta.

Next, the authors examine the two major intellectual axes on which the Euro-crisis is being analyzed:
1. Solvency versus Liquidity
2. Austerity versus Stimulus
I totally LOVED this part of the book. It is thorough and balanced. Three authors involved, whoever wrote those two chapters is the best of the three.

Next comes a list, a bloody amazing and thorough list, of the technical problems with the specifics of the setup. You can be an expert on solvency versus liquidity, you can think you have a strong view on austerity versus stimulus, but who cares if you don’t know what the problems are you will apply your principles to. Luckily it’s all here and it’s explained well:

1. France and Germany disagree about monetization. The Germans thought they got their way when they stuck in the Maastricht treaty and the subsequent agreements the Stability and Growth Pact and the sundry prohibitions against monetary financing. Except the French let the Basel treaty do all the work for them, when it gave zero weight to government debt. When all banks were left holding peripheral debt, the Germans found themselves confronted with a fait accompli.

2. Banks were encouraged to lend cross-border, but there was no EU-wide scheme to support savers’ deposits, no cross-EU liquidation process (with banks international in their life but local in death) and no cross-EU supervision either, the latter at the insistence of the Germans, who (i) were afraid the ECB would be morally obliged to save banks it had failed to properly supervise and (ii) did not want anybody outside Germany to supervise the Landesbanken.

3. Free movement of labor is not supported by the remaining institutions that go hand-in-hand with having a labor force. Retirement schemes are national, unemployment insurance is national, labor contract law is extremely different from one nation to another. This not only causes massive issues with “automatic stabilizers” when recession hits (in sharp contrast with the US, for example, where the Federal government picks up the bill on the 13 weeks of unemployment insurance if recession hits in West Virginia), it also causes a one-way flow of labor to where the setup is best.

4. Free movement of capital, similarly, directs investment to the lowest-tax states, creating the problems we regularly read about in the newspaper.

5. Some countries have a totally antiquated microeconomic setup which makes it impossible for them to compete with the more modern economies. The authors make an amazingly diplomatic attempt to present the Italian problem as an Italian “perspective” and list Italy alongside the IMF and the ECB and the Anglosaxons as one of the “other perspectives” but I, for one, was not fooled. I knew exactly where they were going with this. Also, I’ve been trading Italy since 1993 (indeed, my career is 100% based on a trading decision I was forced into in 1995 to buy a billion dollars' worth of CcT bonds swapped into USD), I’ve read extensively about Italy and I’ve even written about it and I can say the book is worth buying for the Italy chapter alone. Structural reforms, baby!

Finally, the book gives you the full, definitive narrative of the crisis, day-by-day. Not only what happened, but a full list of the possible motivations for all the actors. Example: I’m reading about the LTRO’s at the beginning of 2012 and the authors are giving a tremendous analysis of how it was two birds with one stone because it was a way for the (peripheral) banks to get paid to support their own governments’ debt and I’m thinking “sure, but you’re leaving out the biggie!” Except then I realize there’s a further chapter on how they all had debt maturing in 2012 (that had been issued mid-crisis with short-term maturities) and how the LTRO gave them three years to refund it. So this is a very thorough narrative indeed. They walk you step-by-step through all of the ECB’s actions, all the way from that day that they stunned us with the 100 billion when subprime hit all the way to the most recent fun that’s been had with ELA and QE.

So how come this is not my favorite book on the Euro?

The answer would be that there is no passion here. It’s more of an “owner’s manual.” Not one bad word is said about anybody, there’s nothing that could have been done better, nobody ever made any mistakes. Trichet was right to oppose a Greek restructuring, Draghi was a hero when he bet Merkel would bend, even Merkozy did not really do much wrong in Deauville if you read the book literally. And both the French and the Germans are right about everything.

So it’s not a book you can love.

But if you want to talk Euro with me and you have not read it, I’m afraid I can’t waste my time. Read it first and then we can talk. It is now The Source.

[Jake · Rating 4 out of 5]

This was a good book. If I have one complaint, it's that it was too extensive for my needs. I was looking for a sort of primer on the euro crisis. While I got the key events, I had to work for them, partially because the book is not laid out chronologically. On the other hand, the book does a great job covering the history of different countries and institutions involved in the crisis and uses that to explain their motivations during the crisis. On the whole, I feel better equipped to interpret new developments in the eurozone.

[Volition · Rating 4 out of 5]

''Policy is made by utopian idealists and ignoramuses''
-The State of Africa

''It was frequently claimed, in the context of the bitter divisions in Europe, that the central banks were the only grownups in the room''
-The Euro and the Battle of Ideas

Reading this it is important to remember that a hundred economists could very well not share even a single braincell between them dedicated to common sense.

A sheepherder does not punish its sheep for being incorrectly herded by their shepherd dog, yet the population of a country must be held solely accountable for the actions of their bankers and politicians, while the guilty suffer none of the consequences; all for fear of ''moral hazard'' (the fear that not punishing bad decisions will make those decisions an encouraged course of action).

If moral hazard is such a great fear, punish the guilty, not the uninvolved and oblivious; this process is doomed to repeat if no actions are taken against the actual moral hazard.

This book, however, focuses on what the actual discussions were about, which offer a stark and sobering insight into how convoluted and obtuse things can get, while spraying in enough tid-bits about deeper motivations that make it clear to most readers that a lot of actions were taken out of self-interest and improvement at the expense of other countries, and most plans being put forward are either bad or poorly thought out.

It's an interesting and entertaining read full of facepalms and horrendous economic plans.

___

The highpoint, IMO, being that the euro was created without much of a plan behind it except ''the free market will make it work, and if things start going poorly, further unification and cooperation will be the solution to any problem'', this coming at a time when cooperation was problematic to get going; the euro was believed to ''enforce cooperation down the line, through necessity'' since if people refused to cooperate at that point, the entire thing might come tumbling down and ruin the whole of the EU... so, of course, it turned into a tool for blackmailing others to fall in line or face collapse, as anyone could have predicted.

Cooperation at gunpoint somehow did not improve the relationships between EU countries; baffling.

[Marie · Rating 2 out of 5]

An interesting read for a multi-cultural understanding of the euro crisis, but read more as an apology for the German perspective.

[Byrne · Rating 3 out of 5]

The Euro is about a fight between the three basic approaches developed nations have to fighting a severe financial crisis. The book personifies them based on national stereotypes. The approaches:

1. Anglo-American: everything is publicly traded, and everyone is in debt. When there's a recession, you lose your job/savings/house, but five years later you're richer than ever. (Unless you work in manufacturing or resource extraction, in which case five years later you're switching from Oxy to something harder.)
2. German: Anglo-American for countries with bigger banking systems than bond markets. Everyone must pay what they owe, countries must take a weed-whacker to their budgets, all belts must be tightened as much as possible. As long as you can make your interest payments, the fact that your loan's market value has dropped doesn't matter; the loan is being held to maturity, so you have time to make good. Five years later, your economy has restructured itself and you're richer than ever, although there were some tough times in between. Perfect for a country with a high savings rate, tremendous exports, abundant social capital, unions whose internal discount rate is similar to that of college endowments, etc. Tough for everyone else.
3. The Franco-Italian model: There's a difference between a liquidity crisis and a solvency crisis, but a liquidity crisis can become a solvency crisis if the policy response makes the economy shrink. Bailouts at every level of the economy, from sovereign debt to banking to consumers, prevent the economy from shrinking much in nominal terms even when markets drop. During a depression, you don't lose your job, your savings, or your house. This is good news, because your kids will be unemployed and living in your basement until they're 35.

The Anglo-Americans don't really participate in this debate, so the book is mostly a dialogue between the Germans and the French/Italians/Greeks/Spanish/Irish etc. Since Germany is rich and sees itself (correctly) as the linchpin of the EU, the compromise tends to involve spending Germany's current account surplus to backstop somebody else's deficits. In retrospect, telling Germany, Ireland, and Greece to use the same monetary system was a better premise for a sitcom than for an economic system.

The basic tradeoff seems to be that if you take the German approach, the recession is much deeper than it otherwise could be. The French/Italian approach has the benefit of blunting the impact of a recession, but since "the impact" is that the worst-run businesses in your country finally shut down and their employees find something better to do with their time and talents, this is not an unmitigated boon.

The debate comes down to whether you think long-term economic growth is limited by the trendline in Y/Y nominal consumer spending, or whether you think it's driven by the creation of new and better ways to produce goods and services. Strangely, which side you choose in that debate seems to depend on what your country's balance of trade looks like.

[Frank Stein · Rating 3 out of 5]

The European financial crisis of the 2010s is one of the most consequential crises in modern times, and I very much appreciated that three respected economists wanted to use it as an opportunity to investigate European, but, most especially, French and German, economic and ideological differences. As the authors show, France historically was more of a believer in laissez faire, especially through the writings of such famous economists as Jean-Baptiste Say and Frederic Bastiat, but even later writers like Mauris Allais and Jacques Rueff, while Germany believed in Staatswirftschaft and state-driven development, as demonstrated by writers like Adolph Wagner and Werner Sombart. But after World War II these nations' ideologies switched. The French thought laissez-faire had been discredited by the Depression and the economy's failure to prepare for the German invasion, while Germany became more obsessed with divided powers, fedeeralism, and a rules-based economic order for obvious reasons. These new views help explain why the two main European powers diverged during the crisis.

The meeting of Presidents Sarkozy and Merkel in October 2010 in Deauville, France, where they agreed on the basic German contention that Greek bondholders would have to take haircuts, created the first part of the crisis. The creation of the European Stability Mechanism and the start at the sane time of a European System of Financial Supervision, along with its new resolution rules, which went into effect in three years, ended the most acute phase of the crisis. The ECB Mario Draghi "whatever it takes" plan at the same time did not begun fully institutionalized until the quantitative easing of 2015, which also marked the new deal with Greek's radical left Syriza government. The author's argue that these turns showed the adoption of the French "liquidity" view of the crisis (as opposed to the German view that financial distress was largley solvency related) and marked the more official end of it.

The problem with this book is that throughout 16 chapters the same issues (French/German divergences, liquidity/solvency, integration vs. nationalism) keep coming up again and again, often in just slightly separate guises, and the same events (Deauville, ESM, "whatever it takes") do too. I had trouble disentangling the actual chronology here and what was and wasn't important. Yet this remains one of the few books to take a complete overview of the crisis and also put it in an ideological lens.

[Andrei · Rating 1 out of 5]

Couldn't finish it. Made it to about half-way. This book is such an editorial clusterphuck, it's unbelievable that Princeton UP gave it a green light for publishing. What the hell is it meant to be? I expected a constructivist account of the euro debates and their impact on policy; what we get instead is a motley mess of a quasi economics & finance textbook intersperced with random historical facts and the rare 'oh, here, german national ideas were so different than french national ideas', and all thrown together with utter nonchalance and no overarching vision or direction into the most disgusting regurgitated soup of information you've ever had. great job.

[Hector Sanchis · Rating 5 out of 5]

One of the most complete books I've read so far. It explains clearly and detailed how the European union works and helps you to understand what habe been the main risks all over the time. It's a dense book, but it worths

[Ararat Gocmen · Rating 3 out of 5]

Fantastically rich details about Eurozone policy debates from the 2008 financial crisis to 2016, but the structure of the book makes it hard to keep track of all those details, while the “German vs. French battle of ideas” is not the most convincing framing.

[Benji · Rating 4 out of 5]

Plea to make the best of both (German and French) economic philosophies.

[Von_feng · Rating 5 out of 5]

在调和任何不同观点之前，需要各方对不同观点有深入的了解。危机前及危机中各方不同的经济哲学是基于对经济学作用方式的不同看法所致的。因此，概念性澄清有助于更深刻地认识社会独特性的来源。全书梳理了欧元的思想之争的前因后果，对于理解欧元区的货币政策和财政政策提供了一个较为新颖的视角。

[Chris · Rating 3 out of 5]

Interesting but it's so badly edited that seems as if the chapters are completely disconnected

[Miguel Angel · Rating 5 out of 5]

Libro interesante para ilustrar el funcionamiento de las instituciones europeas.

[Sam Seitz · Rating 4 out of 5]

This is a simply terrific book, as it contains many variegated and interesting stand-alone chapters that address different elements of the euro crisis. Each chapter is paired with several others to form discrete sections, making the book extremely easy to navigate. It’s not worth covering each of these sections in detail, but they include, among other things, discussions of the role of national governments, the differences between French and German economic philosophy, solvency problems versus liquidity problems, and the costs and benefits of austerity. A good deal of the analysis is fairly simple and intuitive, especially for those with a good understanding of European economics. I nonetheless found much to appreciate about the book, especially its excellent bibliography. Indeed, I can confidently say that this is the best general volume on the European sovereign debt crisis by a pretty hefty margin, and I have read quite a few books on the topic by this point.

[Erik Champenois · Rating 5 out of 5]

4.5 stars: German-French perspectives on the Eurozone
The authors being German, British and French, this book seeks greater mutual understanding of the different ideals underlying French-German (and by extension, general North-South) policy differences in the eurozone as one step towards better policy-making. It overviews clashing economic ideals held by France and Germany over the last hundred years and explores current differing perspectives on liability and solidarity, solvency and liquidity, and austerity and stimulus. Additional chapters deal with global, Anglo-American and IMF perspectives on the eurozone as well as the strengthened role of the European Central Bank.

Anyone who wants to understand what has happened in response to the eurozone crisis and what remains to be done today should read this book. Being an economics book, a general understanding of economics is of course required but the authors do a great job explaining in depth the underlying economic principles and perspectives pertinent to the subject. The only thing that seems lacking is a slightly wider perspective on the eurozone's history, its design weaknesses and remaining solutions. Yes, they are dealt with but the focus is more on current history and French-German economics history than on the history of the euro before the eurozone crisis - an extension of the policy recommendation sections could have made an even better book. Even so, I highly recommend the book to anyone wanting to understand the eurocrisis and the current condition of the eurozone.

[Vincenzo Tagle · Rating 4 out of 5]

The main thesis of this book is that the euro crisis is a product of a long-simmering battle of ideas between Germany and France. After World War II, Germany would focus on strict debt repayment and would prefer low inflation to increase the real value of nominal debt. Meanwhile, France would be amenable to debt forgiveness, and would be permissive of higher inflation to erode the real value of debt. These opposing visions are irreconcilable - one focuses on "rules, rigor and consistency", while the other is on "flexibility, adaptability and innovation". The former approach worries about insolvency and the moral hazard inherent in bailing out, while the latter sees most economic issues as temporary liquidity problems that can be solved by lending.

I highly recommend this book to people who want to learn more about the euro crisis and how the euro works in general. It touches on the institutional constraints facing the ECB as well as the debates surrounding solvency vs liquidity, and austerity vs stimulus. Some economics background is recommended but not required.

[Elena Calistru · Rating 4 out of 5]

O istorie interesantă a evoluției politicilor europene în zona fiscală și monetară, care pune în centru diferențele ideologice și de filosofie economică dintre tradiția germană și cea franceză. Cartea e scrisă în 2016 și e foarte simpatic de văzut cum lucrurile care păreau imposibile acum doar câțiva ani (i.e. împrumuturi comune) au devenit între timp și ele istorie.

[Carlos Vasconcelos · Rating 4 out of 5]

Very interesting approach, but in the end the reader gets the idea that indeed 3 books were forcefully merged together.

[Aurelija · Rating 4 out of 5]

“Europe would be built through crises, and […] would be the sum of their solutions.”