The Euro and the Battle of Ideas
Why German and French economic doctrines produce different euro policies.
Summary
Brunnermeier, an economist, James, a historian, and Landau, a former central banker, argue that the euro crisis was driven less by economics than by an unresolved conflict between two national economic traditions, principally the German and the French, embedded in the currency's design.
The German tradition, they argue, comes from ordoliberalism and emphasises rules, liability aligned with control, the moral hazard created by rescue, and solvency as the framing of any crisis. The French tradition emphasises discretion, coordinated action by the state, the risk of contagion, and liquidity as the framing. Applied to the same situation these traditions produce opposite prescriptions: one requires conditionality and adjustment, the other requires fast unconditional support. The authors show how each crisis episode, including Greece, Ireland, Cyprus, banking union and Outright Monetary Transactions, was contested along this line.
They also cover the design flaws directly: no fiscal union, no banking union at the outset, the doom loop between sovereigns and their domestic banks holding sovereign debt, the absence of a safe asset, and the absence of any exit or restructuring mechanism.
The book is even-handed and unusually good at stating each side's position in its strongest form. It is more analytical than narrative and assumes some familiarity with the events. It was published in 2016, before the pandemic recovery fund, which represented a partial move toward the French position and which is the main test of the book's framework since publication.
Key takeaways 7
- The euro crisis was contested between two economic traditions embedded in the currency's design, and the disagreement was about framing rather than about facts.
- The German tradition treats a crisis as a solvency problem requiring conditionality, while the French tradition treats it as a liquidity problem requiring fast unconditional support.
- Whether a crisis is diagnosed as liquidity or solvency determines the entire policy response, and the diagnosis is rarely determinable from the evidence at the time.
- The doom loop between sovereigns and domestic banks holding their debt was the central structural flaw, because it made each unable to rescue the other.
- Monetary union without fiscal union, banking union or a common safe asset left no mechanism for absorbing an asymmetric shock.
- Rules provide credibility and remove the flexibility a crisis requires, which is a genuine trade-off rather than a mistake by either side.
- The absence of any exit or restructuring mechanism meant every problem had to be resolved through rescue, which reinforced exactly the moral hazard the rules were meant to prevent.
Who should read it
Macro investors with European exposure who need the institutional and intellectual sources of how euro area policy disagreements resolve.
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