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Mercredi 05 Octobre 2016
If there was ever a time to revamp the seventeen-year-old monetary union that is the eurozone, many would argue now is that time.
Débat - The Euro and the Battle of Ideas

The Euro and the Battle of Ideas by Markus K. Brunnermeier, Harold James & Jean-Pierre Landau

The euro has been buffeted continually since the eurozone debt crisis broke out in late 2009. UK voters’ decision to leave the EU in June of this year only served to add fuel to the incendiary idea that the monetary union is doomed to implode.

The list of economic woes afflicting the eurozone is long and well known. To name but a few: an incomplete banking union (to date, for example, the European Deposit Insurance Scheme [EDIS] is still a proposal); an increasingly fragile banking sector; internal and external imbalances (i.e. substantial differences in trade and employment levels among member countries); and low and even negative interest rates failing to spur investment and growth.

Proposals abound on how to resolve these problems. But while EU leaders are and have been aware of the causes of these shortcomings, they continue to persist. In other words, if policy makers have an idea of how to resolve at least some of the Union’s ills, why are the solutions so long coming?

It is precisely this question that is the premise of the recent book, The Euro and the Battle of Ideas, by Markus Brunnermeier, professor of economics at Princeton University, Harold James, professor of history at Princeton University, and Jean-Pierre Landau, former deputy governor of the Banque de France and associate professor at the Paris Institute of Political Studies. They argue that the Franco-German core of the Eurozone is torn between two fundamentally different approaches to economics.

France Stratégie invited Brunnermeier and Landau in September to discuss how these divisions can be overcome to rebuild the beleaguered eurozone.

Brunnermeier detailed how WWII largely determined both France’s and Germany’s economic post-war models. The former’s pursuit of austerity measures and other laissez-faire policies, which led to a decline in military spending in the 1930s, made it vulnerable to the 1940 German attack. This humiliation pushed it to move towards a model with strong central planning following the war.

In Germany, on the other hand, the Nazis’ extreme concentration of power in Berlin resulted in an aversion after the war to any centralized power, be it economic or political. The focus was entirely on competition, and, encouraged by the allies, it served the country well.

Fast forward to the 2010s, and the authors contend that each country’s interests in resolving the eurozone crisis can be seen through the lens of their different model. They refer to this as the “Rhine divide”. France puts the emphasis on discretion, solidarity, liquidity to keep contagion at bay and Keynesian stimulus.

But through the German prism the rules trump discretion, member state’s individual liability (i.e. abiding by the so-called no-bailout clause of the Treaty of Lisbon) is more important than solidarity, solvency takes precedence over liquidity and austerity measures and reform are more beneficial than any stimulus programme.

In the current crisis, European banks operated under the assumption that sovereign debt was risk free, a perception Basel bank regulations helped reinforce. The result was a “diabolical loop”, with sovereign risk and bank weakness reinforcing each other. This was compounded by the problem of flight to safety when confidence in a country’s debt waned. Seen through the framework of the different models, France looked to a bailout and Germany voiced concerns about respecting the no-bailout clause.

Brunnermeier explained the authors developed a union of ideas as a way of bridging the Rhine divide and reconciling the French idea of solidarity with the German belief in liability. Key to this is making sure any insurance mechanisms are not politically motivated and don’t lead to automatic and permanent transfers.

Brunnermeier, Landau and James propose creating a European-wide secure asset, Euro-Safe-Bonds, (ESBies), to act as such a safety valve. This is predicated on the fact that establishing euro bonds is not politically feasible for the simple reason they would engage the liability of member states and so would require a common fiscal policy. For ESBies, a European debt agency would buy government debt, financing them by issuing different securities, one being extremely safe ESBies and the other a junior tranche that would “take the hit” in the event of a default.

They also recommend a European banking charter, whereby taxes would accrue to the EU budget, which if necessary would be a backstop to insure deposits and prevent spillover and contagion.

The difficulty, of course, lies in getting member states with different frameworks to agree on such actions – not simply reach a middle point from their different positions. For this is a common pitfall for nations when negotiating. Jean-Pisani Ferry, France Stratégie commissioner-general, cited Richard Cooper’s book on international economic cooperation. In it the author details how lack of agreement among countries in the 19th century on how to deal with cholera led to a counterproductive and ineffectual compromise: the short quarantine.

Even if an effective agreement is reached, the process can drag on. This was the case with Greece, where it took two years for its debt to be restructured and the ECB to stabilize bond markets. This points to what is perhaps more worrying than France and Germany diverging on how they view the crisis: the lack of a power structure to make a decision.

As was stressed several times in the discussion, the euro has to be seen as a cooperative project, not a zero-sum game, as a participant put it. It is too often grasped as a question of one or several nations “saving” other countries in the eurozone that are struggling, when it’s in every member state’s interest to ensure financial stability is restored and maintained.

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Richard Venturi
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