Unhappy Union: How the Euro Crisis – and Europe – Can be Fixed, by John Peet and Anton La Guardia, Economist Books, RRP£20/$23.99
After containing a populist backlash in May’s European Parliament elections, and with the fractious designation of Jean-Claude Juncker as Commission president all but complete, there are hopes that the EU can finally turn the page on some of its most difficult years. Yet, while sovereign bond yields in countries such as Ireland and Spain have come down sharply from the heights reached during the eurozone crisis, there is little sign of a sustained recovery. Many remain unconvinced that the EU, and the currency union in particular, have done enough to fix the institutional flaws exposed by the crisis. The new Commission president faces the task of trying to restructure a still imperfect union in spite of the reform fatigue that has permeated Brussels and national capitals.
Mr Juncker, as he embarks on his journey, may want to pick up a copy of Unhappy Union, a dispassionate diagnosis of the bloc’s faults written by John Peet and Anton La Guardia, journalists from The Economist. The book offers a convincing summary of the eurozone crisis, as well as a useful list of prescriptions to ensure the EU and the currency union at its heart regain the mojo and the stature they have lost since the start of the decade.
As La Guardia and Peet argue, the eurozone’s politicians made a serious conceptual mistake in confronting the turmoil that entangled Greece and the rest of the bloc’s periphery. Policy makers assumed the crisis was the consequence of the lack of enforcement of fiscal rules but “it was property bubbles, imbalances and the unstable structure of the eurozone”.
The error had its roots in the Maastricht treaty, which focused on deficit and debt targets but failed to ensure labour and product markets were flexible enough to withstand shocks.
Was the euro introduced prematurely? La Guardia and Peet think so. “Monetary union should have been the culmination of political union, not the means to achieve it,” they write. But while it is tempting to blame the single currency, Europe’s woes were mainly the result of the authorities’ incompetent crisis response.
Furthermore, as the book correctly contends, ditching the euro would not wash away the bloc’s original sin. A break-up would set off a wave of defaults. Companies in weaker countries would struggle to repay euro-denominated debts using steeply devalued national currencies. Governments would then rush to implement protectionist steps to support local businesses, bringing the single market to an end. Without the freedom to ship goods across member states, the EU would become a frail and futile entity.
So the single currency should be preserved but the eurozone requires reforms deeper than those implemented during the crisis. As the authors suggest, the calm that has prevailed in the bloc’s markets for the past year is largely the result of the European Central Bank’s promise to buy unlimited quantities of sovereign bonds, but the Outright Monetary Transmissions programme is untested. Any rescue involving the OMT would also require the approval of German lawmakers who have been critical of bond purchases by the central bank. Nor is the banking union, which officials agreed to set up, worthy of its name. It lacks a taxpayer-funded backstop, which is essential during a crisis.
Unhappy Union calls for the eurozone to copy Alexander Hamilton, the 18th-century Treasury secretary who laid the foundations for the US fiscal infrastructure. The authors would like a bigger federal budget that could pay for a common unemployment benefit scheme. This would help individual member states as they experience phases of economic distress. The book also includes a plea for euro bonds. These are all sensible proposals, even though the political constraints are unlikely to disappear soon.
Politically, the authors say, the road ahead includes a stronger role for national governments at the expense of both the European Parliament and the commission. Here they are less persuasive. They contend that parliament lacks legitimacy because of the low turnout in its elections. The presence of a rising number of populists and eurosceptics is likely to diminish its status in the eyes of the public. Yet the variety of views among lawmakers shows the body is representative.
National elections in several countries, including the US, are marred by low turnouts. This makes them no less valid than elsewhere.
Still, the writers are right in arguing that no federalist leap forward will take place without government leadership. Germany, as the bloc’s creditor-in-chief, holds a special role. Angela Merkel’s “step-by-step” strategy may have succeeded in securing her three terms as chancellor. But a truly successful eurozone requires a different kind of vision and courage from the one Berlin has shown so far.
The writer is the FT’s global economy news editor