Back to basics

Europe’s Unfinished Currency: The Political Economics of the Euro, by Thomas Mayer, Anthem Press £19.99/$26.99, 272 pages

When the Berlin Wall fell in 1989, East Germans shouted in the streets: “If the D-Mark doesn’t come to us, we will come to it!”

Modern money, in other words, is highly political – a fact that is once again painfully apparent in Europe. For Thomas Mayer, a senior fellow at the Goethe University in Frankfurt and senior adviser to Deutsche Bank, the crisis now engulfing the eurozone can largely be explained by the single currency’s origins as a project to bring about greater unity. If its future is to be assured, Europe’s leaders will need to return to economic fundamentals.

For most of the euro’s first decade, Mayer argues in Europe’s Unfinished Currency, flaws in the European monetary union were papered over by cheap credit. But things were quietly going wrong. Citizens in Greece and Portugal borrowed heavily and lenders failed to take a rigorous approach to credit quality. Financial markets treated the government debt of all eurozone nations as risk-free, while the architects of the euro failed to plan for a crisis, destroying their credibility when disaster struck.

The irony, for Mayer, is that by the time the euro came into circulation, its rationale no longer made sense, the prospect of another catastrophic European war having disappeared with the fall of the Berlin Wall. Nor does he find much evidence of economic benefits. In particular, he believes that we cannot say with any certainty that Germany has reaped any clear rewards from membership.

Mayer disagrees with German chancellor Angela Merkel’s push to achieve greater fiscal and political union in Europe. He also makes a case for the European Central Bank to be allowed to lend directly to governments, something that Merkel has resisted strongly.

Instead, Mayer proposes a tougher, meaner eurozone: one in which governments have a real incentive to tidy up their finances. Europe, he argues, should model itself along the lines of the US in the mid-19th century, in which states were left to default on their debt and became more fiscally conservative as a result.

Europe’s Unfinished Currency can be read as a primer for the eurozone crisis, though lay readers may struggle with some of the economic debate. Terms such as seigniorage or book money are not always fully explained, and a chapter dedicated to the operations of balance of payments between eurozone countries and Target2 payments on the European Central Bank’s balance sheet is particularly dense.

Mayer’s rejection of political and fiscal union also raises the question of why he tries so hard to find a solution for the euro. The answer is that he is very concerned about the longer-term effects of central banks printing money. He thinks that “when” US central bankers lose control of inflation, there will be a loss of confidence in the global monetary system and the dollar. That could see smaller countries struggling to defend the value of their currencies. A Europe with a common currency, he believes, will survive in this world better.

Alice Ross is the FT’s currencies correspondent

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