Where the Next Flashpoint Might Be: Germany

We talk to political economist Helen Thompson about the birth of the Euro and its tortuous recent history. Whose idea was it in the first place and how much of its current troubles were baked into its origins? A story of ambition, intrigue and unintended consequences.

Talking Points:

The euro was the brainchild of the French government, sometime around late 1987.

• The French had become extremely dissatisfied with the exchange rate mechanism. They thought the set-up benefitted Germany to the expense of everyone else.
• France saw monetary union as a way to Europeanize monetary policy.

The French persuaded the rest of the European community to set up a committee to look into monetary union, which was chaired by the former French finance minister.

• He understood that union would have to be on German terms: there would be an independent central bank committed to price stability.
• Helmut Kohl also wanted shifts on the institutional questions within the European Community.

The Maastricht Treaty was agreed in December 1991—ratification went on for two years.

• The treaty is about much more than monetary union.
• During contentious elections, Kohl started talking about monetary union as a symbol of European peace rather than a purely macroeconomic issue.

The general improvement in economic conditions in the mid-1990s allowed the monetary union to proceed.

• This doesn’t mean that there weren’t significant issues, but there wasn’t an existential crisis like the one that would emerge in 2009 with Greece.

Before the euro itself got going, there was the convergence of interest rates. Even for states like Italy and Greece, that has been a clear advantage.

• You also see some alignment on inflation. 
• But you don’t get fiscal convergence. Some states run much higher deficits than others.

If the euro were to end now, it would be because of an implosion not states voluntarily seceding.

• There is more skepticism over the euro in Eastern Europe.

There is a recession coming; this will put more pressure on this system.

• The flashpoint may be Germany. 
• There is going to be considerable pressure to go back to quantitative easing. Whether Draghi’s successor can secure tacit German approval is a different question. 

Further Learning:

• Helen for the LRB: Will the EU hold?

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