The Eurozone Crisis: An Annotated Bibliography:
LECTURE THREE

INTRODUCTION:

One of the great puzzles in explaining the Eurozone Crisis (EZC) is to know where to begin. Is it part of the Great or Global Financial Crisis (GFC) (2008) or a separate crisis?

Let’s leave that historical puzzle aside, at least for a moment, and focus instead on an ostensibly easier question:

What is the Eurozone Crisis?

Der Spiegel defines it this way:

“First Greece—then Ireland, Italy, Spain, and Portugal: The European Common Currency has come under pressure from large national debts and the effects of the great financial crisis, ultimately requiring a rescue package close to a trillion euros.”

On this view, the EZC is a sovereign debt crisis.  What is sovereign debt? And why should debt lead to a crisis?  The country with the largest government debt --Japan--is not in crisis; its economy is relatively robust; and its currency remains strong.

[Der Spiegel gives a backwards running commentary –i.e. from most recent newsworthy events to most distant. 

It is well worth scrolling back through these. Start at the beginning.

We are talking about hundreds of stories here.

Interestingly, the first article included in their EZC archive is this—dated December 2009: note the focus is still on the financial crisis of 2008—otherwise known as the Great Financial Crisis (GFC) or Lehman Crisis, but fears are brewing:  

“Practically unnoticed by the public, an issue has returned to the forefront in recent weeks -- one that was a cause for great concern at the height of the financial crisis but then, as optimism about the economy began to grow, was eventually forgotten: the fear of a national bankruptcy in the euro zone. And the question as to whether such a bankruptcy, should it come about, could destroy the common European currency. Greece was always at the very top of the list of countries at risk. But now the danger appears to be more acute than ever.”]

Wikipedia defines it this way:

“The European debt crisis (often also referred to as the Eurozone crisis or the European sovereign debt crisis) is a multi-year debt crisis that has been taking place in the European Union since the end of 2009.”

Let’s assume then, at least for the moment, that the EZC is a sovereign debt crisis. 

Immediately, this requires us to say something about debt. What is sovereign debt? And when does it become a crisis?

Sovereign Debt (as defined by the Financial Times)::

This is debt that is issued by a national government. It is theoretically considered to be risk-free, as the government can employ different measures to guarantee repayment, e.g. increase taxes or print money.

In practice, there have been multiple cases in which governments could not serve their debt obligations and had to default. As a consequence, investors ask for different yields across countries. The more a country's repayment ability is in question and the riskier sovereign debt becomes, the higher is its yield

Very simply--the more risky a country is; the more it must pay in interest to borrow money. Risky countries thus have high-yield bonds.

Sovereign debt (also known as public debt, national debt, or the national debt) must be distinguished from private debt--which is the debt run up by individual households (credit card debt, mortgages etc) and private corporations (including banks).

It is important to distinguish between sovereign and private debt, because different countries have different levels of each.

First some figures/Tables (as of 2010 when the EZC became a big problem).

ICELAND AND IRELAND

Perhaps not surprisingly, the first country to blow-up financially was Iceland (not a member of the EU or the Eurozone) in 2008. Its problem was private debt—the debts run up by its banking sector.

Iceland is an important case, because it suggests that the Euro is not the source of all problems in Europe.

Ireland was to run into very similar problems.

For the Iceland story, see this short documentary and these articles: here and here and here and here; and for a comparison of the Iceland and Ireland situations, see here.

For a short documentary introducing the problems of Ireland (from 2011), see here and here

So was the EZC a crisis of public debt (too much government spending) or a crisis of private debt (too much debt –or leverage—from the banking sector)? Clearly, a different story is needed for different countries.

Which Eurozone Countries had what problems?


Greece...Budget Deficit?...Sovereign Debt?....Private Debt?...BoP Deficit?....Low Growth?

Italy....Budget Deficit?...Sovereign Debt?....Private Debt?...BoP Deficit?........Low Growth?

Ireland....Budget Deficit?...Sovereign Debt?...Private Debt?...BoP Deficit?....Low Growth?

Portugal...Budget Deficit?...Sovereign Debt?....Private Debt?...BoP Deficit?....Low Growth?

Spain......Budget Deficit?...Sovereign Debt?....Private Debt?...BoP Deficit?....Low Growth?

UK....Budget Deficit?...Sovereign Debt?....Private Debt?...BoP Deficit?....Low Growth?

Japan...Budget Deficit?...Sovereign Debt?....Private Debt?...BoP Deficit?....Low Growth?.

USA...Budget Deficit?...Sovereign Debt?....Private Debt?...BoP Deficit?....Low Growth?.

When do these debt, deficit and growth problems become "a crisis?"  



The best sources of economic data:

Eurostat

Trading Economics

OECDEU Commission, General Government Data

EXPLANATIONS OF THE EZC

For some scholars, the EZC is neither a public or a private debt problem but a balance of payments crisis.  This is the view of Martin Wolf and Paul Krugman, see here. 

As Krugman puts it:

What we’re basically looking at, then, is a balance of payments problem, in which capital flooded south after the creation of the euro, leading to overvaluation in southern Europe. It’s not a perfect fit — Italy managed to have relatively high inflation without large trade deficits. But it’s the main way you should think about where we are.

If Krugman is right, the EZC can be boiled to the problem that Northern European countries (Germany in particular) was much more competitive and exported more than Southern European Countries (Greece in particular but also Portugal, Italy and Spain). The surplus from the Northern European countries was recycled into loans to Southern European Countries, which overloaded the banking system and led to a debt crisis.

In countries with their own currencies, a balance of trade imbalance typically leads to currency adjustments—appreciation in one country; depreciation in the other.  In the Eurozone, currency adjustments are not possible. 

Broadly stated, it is possible to distinguish 7 schools of thought on the causes of the EZC (these explanations are not mutually exclusive):

1.    Those who view the EZC as part of the GFC (or Lehman Crisis). Let's call this the One Long Financial Crisis explanation. This points us to theories of the GFC. (See the Lo article below).

The most impressive work by a scholar along these lines is the work of Adam Tooze, whose book Crashed (2018) is probably the best book both on the GFC and on the EZC. (I say "probably" because one of my friends thinks that Ashoka Mody's book Eurotragedy is better. Ask me after Thanksgiving, when I get a chance to read it.) 

For discussions and reviews of Adam Tooze, 

here (Martin Wolf in the FT)

here (Duncan Weldon in Prospect)

2.  Those who see the EZC and the GFC as a function of the inevitable and incurable faults of capitalism.  (This Marxist explanation informs, for example, the view of John McDonnell, current British Shadow Chancellor: ‘We’ve got to demand systemic change. Look, I’m straight, I’m honest with people: I’m a Marxist....This is a classic crisis of the economy – a classic capitalist crisis. I’ve been waiting for this for a generation!...For Christ’s sake don’t waste it, you know; let’s use this to explain to people this system based on greed and profit does not work.’) Others in this tradition, include Wolfgang Streeck. 

3.  Those who pin the blame primarily on the faults of the Eurozone—the Euro, they argue, was a mad idea from the get go and should never have been invented. (US economists like Martin Feldstein and Joseph Stiglitz and Paul Krugman hold this position.)

4.    Those who pin the blame on the faults of the European Central Bank, (and more generally the so-called Troika (IMF, ECB, and EU), whose austerity-focused policies have turned a minor financial crisis into an existential crisis for the EU (Many European economists hold this view, including Mark Blyth and Barry Eichengreen and Charles Wiplosz and Martin Sandbu.)

5.    Those who pin the blame on the Germans, partly because they support 3. and partly because their economic and trade policies are mercantilist and lead to a beggar-thy-neighbour dynamic (Simon Wren Lewis holds this view; as does Adam Posen)

6.    Those who blame the Greeks (and other Southern European countries) for social, economic, and political practices that led--and continue to lead to--an uncompetitive economy (Stathis Kalyvas, for example, holds this view with respect to Greece; as do many German economists, including the German Finance Minister Schauble; and the Head of the Bundesbank Jens Weidman);

7.    Those who think that the Northern and Southern economies are structurally incompatible. This amounts to a version of position 2. But focuses on internal structural features of the different economies rather than the European Monetary Union itself.  (Peter Hall and the so-called Varieties of Capitalism literature holds this view; this view also informs some of Wolfgang Streeck's writings, including his critique of Sandbu here)

More recently, a number of economists have tried to come up with a multi-causal explanation, which they hope can form the basis of a consensus narrative. See Richard Baldwin et al here.


Clearly there is a lot of material to get through. So what should I read first:

1. Paul Krugman, Can the Euro Be Saved?

2. The Economist, The Origins of the Great Financial Crisis

      3.  Andrew Lo, Reading About the Financial Crisis: A 21 Book Review (Skim)

BONDS and BOND YIELDS

 

The European Monetary Union--Lecture One

One big question hangs over the discussion of the European Montary Union and its currency the EURO--"Was it a bad idea?"

This question continues to divide scholars,  politicians, and ordinary citizens This question has loomed large esp. after the Greek Crisis 2010-2015 and was a factor in Brexit. (leavers complained that the EU had shafted the Greeks.) Even in recent newspapers, the Head of the Hungarian Central Bank has complained that the EURO must go. (Hungary is of course not a member of the EMU.)

The gist of his argument:

Two decades after the euro’s launch, most of the necessary pillars of a successful global currency — a common state, a budget covering at least 15-20 per cent of the eurozone’s total gross domestic product, a eurozone finance minister and a ministry to go with the post — are still missing. 

We rarely admit the real roots of the ill-advised decision to create the common currency: it was a French snare. As Germany unified, François Mitterrand, then French president, feared growing German power and believed convincing the country to give up its Deutschemark would be enough to avoid a German Europe. The chancellor of the time, Helmut Kohl, gave in and considered the euro the ultimate price for a unified Germany. They were both wrong. 

We now have a European Germany, not a German Europe, and the euro was un­able to prevent the emergence of another strong German power. But the Germans also fell into the trap of the “too good to be true” euro. The inclusion of southern European economies in the eurozone led to an exchange rate that was weak enough to allow the Germans to become the strongest global export machine in the EU. This windfall opportunity made them complacent. They neglected to upgrade their infrastructure or to invest enough in future industries. They missed the digital revolution, miscalculated the emergence of China and failed to build pan-European global companies. At the same time, companies like Allianz, Deutsche Bank and Bayer launched fruitless efforts to conquer Wall Street and the US. 

 Most eurozone countries fared better before the euro than they did with it. According to analysis by the Centre for European Policy, there have been few winners and many losers in the first two decades of the euro. The common currency was not needed for European success stories before 1999 and the majority of eurozone member states did not benefit from it later. During the 2008 financial crisis and the 2011-12 eurozone economic crisis, most members were badly hit, having piled up huge government debts. There is no free lunch and cheap loans often cost a lot later. 

....

The time has come to wake up from this harmful and fruitless dream. A good starting point would be to recognise that the single currency is a trap for practically all its members — for different reasons — not a gold mine. EU states, both in and outside the eurozone, should admit that the euro has been a strategic error. The aim of building a global western currency that vies with the dollar was a challenge to the US. The European vision of a United States of Europe has resulted in both open and hidden US warfare against the EU and the eurozone in the past two decades. We need to work out how to free ourselves from this trap. Europeans must give up their risky fantasies of creating a power that rivals the US. Members of the eurozone should be allowed to leave the currency zone in the coming decades, and those remaining should build a more sustainable global currency. Let’s celebrate the 30th anniversary in 2022 of the Maastricht treaty that spawned the euro by rewriting the pact.  

This is not a view I share.  The historical account is dubious ("a French snare") and--in my opinion-- a United States of Europe is the only way of avoiding subordination to Trump's America, Xi' China, and/or Putin's Russia.

Nonetheless, it is your task to figure out if this Hungarian chap is right.

One point worth noting--the EURO is not unpopular in Europe (although there is quite a lot of variation between different countries):

For a more recent discussion (May 2020) of whether or not the EU was a mistake, see the recent discussion between Stefan Auer, a notorious eurosceptic, and Erik Jones-- two eminent EU scholars.

TIMELINE (from The Guardian)

hares

1

1957
The treaty of Rome creates an early incarnation of the EU - the EEC - and identifies exchange rate policies as a "matter of common concern". Fluctuation between the national currencies was seen as a cause of economic instability. 25.3.1957: Unity plan in Europe

1961
An action committee advocating a united Europe proposes a European monetary reserve system as a step towards creating a single currency, though nothing happens until the next decade.

1969
EEC heads of state agree to establish an economic and monetary union by 1980.

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1970
In a move now seen as the start of monetary union, a report by Luxembourg's prime minister, Pierre Werner, suggests that the community moves to a single economy in 10 years, with a fixed exchange rate but no single currency. It is accepted but implementation falters as the Bretton Woods system of fixed exchange rates between the US dollar and European currencies collapses.
19.10.1970: EEC plan a step to political unity

1972
European currencies - including those of non-EEC members - are linked through a "monetary snake", which permits currencies to move against each other within a 4.5% limit. But the 1973-74 oil price crisis forces out sterling, the Italian lira and French franc under pressure from the dollar.
8.3.1972: Six agree on monetary union deal

1979
The snake, by now including only Germany, Denmark and the Benelux countries, is replaced by the European monetary system (EMS). At its core is the exchange rate mechanism (ERM), designed to prevent anything but minor fluctuations between participating currencies. The European currency unit (Ecu) is introduced as an average of the participating currencies.
14.3.1979: EMS starts off with only a whimper

1989
European Community heads of state meet in Madrid and agree to implement economic and monetary union (Emu) in the three steps proposed by the head of the commission, Jacques Delors.
18.4.1989: Delors' plan

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1990
Emu stage one begins with the liberalisation of capital transactions and increased cooperation between national banks. Margaret Thatcher takes Britain into the ERM at what some analysts warn is an inflated rate.
8.10.1990: First step on the road towards full European monetary union

1992
February
The Maastricht Treaty, negotiated in the last months of 1991, is signed, setting out a path to the single currency. With January 1999 as the last allowable date for its introduction. Britain secures an opt-out from this final stage and the Danes reject it in a referendum.
12.12.1991: Maastricht Treaty hailed as great leap forward despite Major concessions

September
Currency speculation on "Black Wednesday" forces a run on the overvalued pound and John Major takes Britain out of the ERM.
17.9.1992: Pound drops out of ERM

1993
The ERM is suspended in August and relaunched in a looser form.
2.8.1993: EC surrenders battle for ERM
26.8.1993: Leader: Mapping the new Europe

1994
January
Emu stage two begins with the establishment of the European monetary institute (EMI) as a forerunner to the European central bank (ECB). Member states commit themselves to working towards currency convergence criteria.

April
Finance ministers settle on introducing the single currency in January 1999, with a three to four year transition period before the national currency notes and coins are replaced.
11.1.1994: Financial Notebook: Birth rites

1995
Heads of state and government decide on "euro" as the name for the new currency.
20.12.1995: European press reaction to naming of the currency

1998
The European Commission recommends 11 countries to participate in the first wave of monetary union: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain. The ECB is set up in Frankfurt and the exchange rates between the euro and national currencies are fixed on December 31.
31.12.1998, leader: The euro has landed

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1999
January 1
The euro comes into effect and the ECB takes over responsibility for monetary policy from central banks. It is principally used for non-cash transactions but the 11 currencies of the member states - such as the franc, peseta and lira - have ceased to exist in their own right and are now simply its subdivisions.
2.1.1999: Euro love is not enough

In the first half of the year the new currency, which was worth $1.17 on its launch, slides towards parity with the dollar and drops beneath it in December.
7.12.1999: Euro edges back above dollar

2000
The ECB intervenes for the first time in September to prop up the euro, which had lost 30% of its value against the dollar in its short life. A week later the Danes say no to joining the single currency in a referendum.
23.9.2000: Three strikes to save single currency

2001
January 1
Greece joins the euro.

August 30
Final design of euro banknotes unveiled. Mass advertising campaign begins, and notes and coins are distributed to major banks.
30.8.2001: ECB unveils euro notes and coins

December
Notes and coins are sent to retailers for training staff and mini-kits of notes and coins are distributed to the public.

2002
January 1
Euro notes and coins become legal tender in 12 countries and "dual circulation" begins.

January 28
The guilder ceases to be legal tender in the Netherlands.

February 9
The punt ceases to be legal tender in Ireland.

February 17
The franc ceases to be legal tender in France.

February 28
National currencies cease to be legal tender in remaining nine eurozone countries.

March 1
The euro is the only legal tender in 12 European countries.

June 30
Smaller banks stop exchanging national banknotes for euros.

October 9
The European Commission recommends that the EU accept 10 new member countries.

November 29
Euro hold-out Sweden sets a date for a national referendum on joining the single currency: September 14 2003.

2003
June 9
The chancellor, Gordon Brown, announces whether or not the five economic tests for Britain to join the euro have been met.

2012
January 1
National notes and coins may no longer be exchanged for free.

The Werner Report 1970 (initially discussed at the Hague 1969) represented the first proposal to set up a Monetary Union between the then 6 member states.  A contemporaneous article notices the federalist implications of the plan:

The Werner Committee's plan for economic and monetary union in the Common Market covers 31 pages. Its fundamental objective is "that the principal economic decisions affecting the EEC will be taken at community level, and that the necessary powers will be transferred to the community [i.e. will be transferred to the supranational level of government]."

The report envisages that by 1980 the Community would formulate budgets, tax policies, and monetary policies; and that there would be a uniform tax system throughout the Community.

It recognises that the transfer of these responsibilities to the Community has "a fundamental political significance and implies the progressive development of political union. The economic and monetary union, therefore, has to be seen as a generator for the development of a political union."

The document says that those must understand its objectives who subscribe to the project, and accept them without equivocation: "Political and monetary unification is an irreversible process and it is essential to go into it with a firm will to achieve it and to accept all its political as well as economic implications."

The Werner Report was shelved, mainly because of a series of global economic crises of the 1970s, including:

--the monetary crisis in 1971 (non-convertibility of the US dollar);

-- the first oil crisis in 1973;

-- the iron and steel crisis in 1974;

 --the economic crisis in 1975;

 --and the second oil crisis in 1979.

1979-1991 European Monetary System (EMS)

"The European Monetary System (EMS) was built on the concept of stable but adjustable exchange rates defined in relation to the newly created European Currency Unit (ECU) – a basket currency based on a weighted average of EMS currencies . Within the EMS, currency fluctuations were controlled through the exchange rate mechanism (ERM) and kept within ±2 .25% of the central rates, with the exception of the lira, which was allowed to fluctuate by ±6% ."

A new plan took shape in 1988 and was published as the Delors Report in 1989.

The idea of a European Monetary Union faced intellectual and political obstacles.

The intellectual obstacles came from economists, who in the 1960s and 1970s had formulated a theory of an Optimum Currency Area (OCA). For a useful summary of this theory, read pages 1-6 of Francesco Paolo Mongelli, “European Economic and Monetary Integration, and the Optimum Currency Area Theory.’’

Crudely stated, OCA—the work of economists like Robert Mundel, Peter Kenen, Ronald Mackinnon and others—sought to identify the conditions necessary for an economic area to share a common currency. Conditions include:

--price and wage flexibility

--mobility of factors of production (capital and labour)

 –product diversification

--openness

--financial integration

--fiscal transfers

--similarity of preferences concerning savings, debt, and life/work balance

--solidarity: are we a community of destiny? do we share your costs?

Why would a group of sovereign states want to set up a monetary union with a common currency?

ADVANTAGES:

1. Eliminate Transaction Costs--check out the currency exchange rates in an airport
2. Eliminate Currency Risk
3. Increases Global/Regional Power--Seniorage
4. Strengthens the Independence of the Central bank
5. Speeds up Economic Integration
6. Speeds up Political Integration (Ever Closer Union)

DISADVANTAGES

1. Countries give up the flexibility of exchange rate depreciation.
2. Absent currency depreciation; countries must rely upon wage deflation.
3. Very difficult to leave a Monetary Union--the Hotel California Problem (see Barry Eichengreen, The Euro: Love It or Leave It; and for a more detailed version, here)

Many economists pointed out in the 1990s that the EU lacked these conditions and a common currency wouldn’t work.

One can go through the 6 conditions of an OCA and argue that some or all are absent.

Source: Baldwin and Wiplosz (2011)

Among the most prescient critics:

Bernard Connolly, The Rotten Heart of Europe (1995)—(this guy was ignored for 15 years, a paraiah in EU circles, until the Greek crisis proved him right)  see interviews and profiles  here and here and here and here

Martin Feldstein, “EMU and International Conflict” (1997)

____  "The Political Economy of the EMU,” Journal of Economic Perspectives, Fall 1997*

These economic objections were dismissed by pro-EU scholars, including this one published—with sad irony—in November 2009 just as the wheels were coming off. (Lars Jonung and Eoin Drea, It can't Happen, It's a Bad Idea, It Won't last: US economists on the Euro 1989-2002)

The Founding Fathers of the European Union

 I'm not sure that focusing on founding fathers is terribly helpful, given the structural forces driving the European nation-states towards some limited forms of integration in the post-war period. See splendidly skeptical note on the role of federalist inspired "founding fathers" expressed by Alan Milward in his The European Rescue of the Nation State. For Milward, the driving idea was not federalism (overcoming the nation-state) but limited integration as a means of rescuing the nation-state. This passage from Chapter Six of his book captures the key point:    

For a critique of the Milward thesis--namely, that European Integration represented an effort to rescue the nation-state rather than overcome or replace it--see Robert Bideleux, "European Integration: Rescue of the Nation-State," The Oxford Handbook of Modern European History (available on the course blackboard website).

My own view of this historian's dispute--both Milward and Bideleux are right and wrong. Like a lot of things that happen in life, people support projects for different, sometimes conflicting, reasons.  

Nonetheless, if one were going to focus on key individuals rather than structural factors; the usual suspects include:

Robert Schuman, 

Jean Monnet, 

Alcide de Gasperi, 

Henri Louis Spaak 

Konrad Adenauer.

Altierro Spinelli

One other figure sometimes makes this list--but I think he doesn't belong on it--is Winston Churchill  

Churchill's status as a founding father of European Integration is much contested.

Yes, his famous Zurich speech can be quoted in support of his position as a FF:

Yet all the while there is a remedy which, if it were generally and spontaneously adopted by the great majority of people in many lands, would as by a miracle transform the whole scene and would in a few years make all Europe, or the greater part of it, as free and happy as Switzerland is today. What is this sovereign remedy? It is to recreate the European fabric, or as much of it as we can, and to provide it with a structure under which it can dwell in peace, safety and freedom. We must build a kind of United States of Europe. In this way only will hundreds of millions of toilers be able to regain the simple joys and hopes which make life worth living. The process is simple. All that is needed is the resolve of hundreds of millions of men and women to do right instead of wrong and to gain as their reward blessing instead of cursing.

But Churchill never expected Britain to be a member and remained a nationalist and an imperialist.

WINSTON CHURCHILL

“Great Britain, the British Commonwealth of Nations, mighty America, and I trust Soviet Russia must be the friends and sponsors of the new Europe and must champion its right to live and shine.”

As Prime Minister in 1953, he was explicit that Britain should not be part of the arrangement. He told the Commons: “Where do we stand? We are not members of the European Defence Community, nor do we intend to be merged in a Federal European system. We feel we have a special relation to both. This can be expressed by prepositions, by the preposition ‘with’ but not ‘of’ – we are with them, but not of them. We have our own Commonwealth and Empire.”

See the very useful materials gathered on Jon Danzig's blog page.  Danzig, however, take the view--which I don't share--that Churchill would have been in favor of British membership in the EU.

A more interesting and important question is the role played by the United States in the project of European Integration. I think the US was key. Every US President from Eisenhower threw until Obama has supported the EU--largely for self-interested reasons. Trump is the exception.

A remarkable feature of the present time--Trump's America, Xi Jinping's China, and Putin's Russia all share one important foreign policy goal--the destruction of the EU. 

For the initial (secret) support of the US foreign policy establishment for the EU, see this article  Richard J. Aldrich. "OSS, CIA and European unity: The American committee on United Europe, 1948-60," Diplomacy and Statecraft.

I will have a lot more to say about US support for the EU in the postwar period (see my "America and European Unity: From Roosevelt to Trump.")