The Euro and the Battle of Ideas
Markus Brunnermeier, Harold James and Jean-Pierre Landau, Princeton University Press, 440 pages, $35. The euro crisis has revealed deep flaws in the single currency’s design. Yet in part because it began with the bailout of Greece, many politicians, especially German ones, think the main culprits were not these design flaws but fiscal profligacy and excessive public debt. That meant the only cure was fiscal austerity. In fact, that has often needlessly prolonged the pain. Later bailouts of countries like Ireland and Spain showed that excessive private debt, property bubbles and overexuberant banks can cause even bigger problems for financial stability. That is one early conclusion of “The Euro and the Battle of Ideas” by three academics from Germany, Britain and France. They describe thoroughly the watershed moments of the crisis. They blame eurozone governments for failing to sort out troubled banks more quickly, for not making the European Central Bank into a lender of last resort and for not pushing through structural reforms in good times. The authors find the roots of these failings in clashing economic ideas. Simplifying a bit, the Germans favor budget austerity even in hard times; the French favor fiscal stimulus on Keynesian lines. The authors propose an insurance mechanism built on a form of Eurobonds designed to please both France and Germany. But the euro crisis is far from over, and France and Germany still have huge differences over the direction of travel. After next year’s elections in both countries, such differences are likely to cause more problems for the single currency.