European Affairs

The Future of the Euro, by Matthias Matthijs and Mark Blyth     Print
Reviewed by William Marmon, Managing Editor European Affairs, Journal of The European Institute.

bill marmon april 2013
 
If the creation of the single currency, the euro, is the crowning accomplishment of the European Union and the high water mark toward union in Europe, what does it say about the future of a united Europe that the euro is, after a spectacular initial success, now in “crisis”?  Has, as Michael Mandelbaum, SAIS Professor, suggested at the recent book launch, the sequence of Eurozone crisis events shown on one hand that political unity is necessary for the survival of the euro and on the other hand rendered political union impossible because of the chasm the crisis has created between Northern Europe and the southern and peripheral states?
 
 
To grapple with these important questions and issues there is no better place to go than the new book, “The Future of the Euro”, a tightly coordinated collection of essays written and edited by two professors, Matthias Matthijs, a Belgian political economist at the Johns Hopkins School of Advanced International Studies, and Mark Blyth, a Scottish professor of political science at Brown and further augmented by the contributions of ten other academics.  The book is surprisingly readable and consistently excellent for a collective volume.
 
It is a bold act of scholarship to write about the future of the euro in the middle of the euro crisis when events are moving rapidly and unpredictably. This book, however, will be relevant regardless of whether Greece leaves the Eurozone next week or next month because it digs deeply into the enduring aspects of the crisis and goes far beyond the simplistic nostrum that crisis was inevitable because a monetary union without a fiscal union is ultimately unworkable.   One thesis of the book is, however, that the euro crisis is at base a political crisis whose solution requires the euro to become more “deeply embedded” in the institutions of the nations (currently 19) who use it.   
 
The book is divided into three parts:  first a sophisticated look at the causes of the crisis, second an examination of how the crisis has played out in four key euro states—Germany, Spain, Italy and France, and third a section on the euro future.
 
The book takes on numerous shibboleths that have developed during the crisis.   E.g. the Greek problem was created by runaway government spending? Not so says Jonathan Hopkin, professor at the London School of Economics and author of the chapter on “Europe’s Troubled Southern Periphery.”  Writes Hopkin, “Whatever the true extent of clientelism and corruption in the Greek public sector, Greece’s government expenditure as a share of GDP is in fact lower than the Eurozone average…until the crisis began in 2007.” Much more important, says Hopkin is the “collapse of the tax intake in the wake of the crisis.”
 
The chapters on Germany, called the “reluctant leader,” show the origins of the German reluctance to agree to substantial transfers to the South as stemming from  the reunification of West and East Germany and the austerity and structural reforms that experience entailed  within Germany.  The book is excellent on the post crisis rise of Germany as the dominant power in Europe and the issues that dominance raises, including the minimization of the German/French partnership as the driving dynamic of the EU. 
 
The book has a good number of “ah ha” moments such as the riff that contends that there would have been a crisis in Europe, even without the euro, because of the extent to which the economies of Europe had been integrated when the economic crisis hit in 2007.
 
The book does not answer the question of whether it would be better or worse if Greece left the Eurozone, although one of the authors Mark Blyth when pressed at the book launch said he felt Grexit would be the best for all concerned.  “Divorce does serve a purpose,” he said.  He also spelled out ways Greece could remain in the Eurozone that would require a restructuring of the debt but to a degree that lenders would claim was forgiveness.  But that might be a better option, he conceded, if Grexit creates another “Lehman Moment” for the world economy.
 
In the section on possible futures the authors, with a bow to “black swan” Nassim Taleb, talk about different scenarios, characterized as “white swans”, “gray swans” and “black swans.” White swans could involve the success of ECB moves to pour a trillion euro of public money into the banking system. Gray swans events are known, serious and mainly negative events like referenda in the UK, Catalonia and Flanders that could result in instability and uncertainty.  Black swans are impossible-to-predict, but one could lie “hidden in the tail…of the unexpected return of a 1930s-style authoritarian regime to one of the Eurozone member states.”
 
The two editors, writing the final chapter, make interesting and pungent predictions.
 
Among them: 
 
“The Eurozone will gradually take over the EU in institutional importance, which will have significant consequences for the ‘euro-outs’ like the UK, Sweden and Denmark. The outs may at some point face a painful choice between joining the euro and leaving the European Union altogether.”
 
“The future of the euro will be decided in Germany, Spain and Italy. France has lost its leadership position in Europe and has yet to find a role.”
 
“There are no sustainable technocratic solutions to the euro problem, which is an inherently political one, and will need political solutions.”
 
“The major current risks to the euro stem from the attempt to make national-level austerity and structural reform superior objectives to restoring Eurozone growth and championing EU political reform.”
 

The Future of the Euro, edited by Matthias Matthijs and Mark Blyth, published by Oxford University Press, 2015, 339 pages.