EuroTragedy: A Drama in Nine Acts
Mody ran the IMF's Ireland programme; Portugal's adjustment is covered inside the euro story.
Summary
Mody, formerly of the International Monetary Fund where he worked on the Irish programme, wrote a history of the euro from its intellectual origins to 2018, organised in nine chronological acts.
His thesis is that the euro was a political project pursued despite consistent economic advice against it, and that the resulting arrangement has damaged the economies it was supposed to integrate. He documents the warnings: American economists including Friedman, Feldstein and Krugman argued in the 1990s that Europe was not an optimal currency area, that it lacked labour mobility and fiscal transfers, and that a single interest rate would suit no member well. He shows that European officials understood these arguments and proceeded because monetary union was the price of German reunification and the vehicle for political integration.
The crisis chapters argue that the European Central Bank was slow at every stage, raising rates in 2008 and again in 2011 when contraction was the risk; that the Greek programme was designed to protect French and German banks; that austerity imposed on contracting economies produced deeper contractions and higher debt ratios; and that the fiscal multiplier under those conditions was far larger than the official models assumed, which the IMF's own research later confirmed.
Mody also argues that the euro's damage is cumulative rather than acute: slow growth, high youth unemployment in the south, delayed investment and lost human capital compound over decades, and the political consequences follow.
The book is one-sided by design and does not present the case that the euro delivered price stability, eliminated exchange rate risk within the bloc or facilitated trade integration. Mody's counterfactual, in which member states retained national currencies, is asserted rather than modelled. His account of the specific policy errors during the crisis is well documented and is the strongest part.
Key takeaways 7
- Economists warned before the euro's creation that Europe was not an optimal currency area, and European officials proceeded knowing this.
- Monetary union was accepted as the political price of German reunification rather than adopted on economic merit.
- The European Central Bank raised interest rates in 2008 and again in 2011 when the risk was contraction, which deepened both downturns.
- The Greek programme was structured to protect French and German bank exposure rather than to restore Greek solvency.
- Fiscal multipliers during a contraction in a monetary union are far larger than the models used to design the austerity programmes assumed.
- A single interest rate produced credit booms in the periphery during the expansion and had no mechanism to stop them.
- The euro's costs appear as slow cumulative damage to growth and employment rather than as a single identifiable crisis.
Who should read it
Investors and analysts with European exposure who want the full critical history of the monetary union's design and crisis management.
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