Book Review: Unhappy Union: How the Euro Crisis – and Europe – Can be Fixed

Reading Unhappy Union by John Peet and Anton La Guardia was an intentional choice to increase my limited understanding of the European Union. In doing so I found a deeper causal relationship between topical market episodes including the bailout of Greece, the rise of nationalist parties, and now Brexit. Decisions made even before the signing in 1992 of the Maastricht Treaty impacted events within the Eurozone. Both world wars, French vs. German struggle for political dominance, East verse West mentality, Northern Protestantism vs. Southern Catholicism rivalries all have had an impact on Europe's ability/inability to work towards closer union. 

In the hope of countries joining the union on "solid" economic footing, the fiscally responsible countries imposed specific requirements:

1. Low inflation 
2. Low long-term interest rates
3. Two years' membership of the exchange-rate mechanism of the EMS
4. Ceilings on public debt of 60% of GDP
5. A limit on budget deficits of 3% of GDP

These five "supposed" criteria were designed to provide a common union to allow the free movement of goods, services, labour, and capital. Not imposing limits on who could join, might lead to moral hazard as countries moved towards monetary union. Germans feared having to pay for Italian and later Greek mismanagement. They foresaw fiscally responsible countries having to pay for those countries that gorged on debt and governmental largess. However, the rules were set with no one to enforce them, and when exceptions in the criteria for Belgium's joining occurred, Greece and Italy utilized similar loopholes to enter the EU during economic upswings. 

As more countries joined the union and gave up control of their currencies (first by pegging it to the Deutschemark, then by adopting the Euro) many gained cheaper access to credit as markets assumed any EU members debt was backed by the rest. To compound this erroneous assumption, by accepting the Euro as their currency, countries lost the ability to manipulate their own monetary instruments including interest rates and their supply of money. This later led to a predicament for national finance ministers losing control of their ability to manage their nation's economy. In Peet and La Guardia’s assessment, "one-size-fits-all interest rate is a one-size-fits-none arrangement that has a tendency to amplify economic divergence. It is now too low for Germany and too high for the Mediterranean countries".

Organizations were set up to manage the newly formed Union in terms of policy creation, governance, and fiscal policy at the EU level. "National governments and their leaders (with an increasingly large role played by finance ministers at the expense of foreign ministers, formerly the main actors in Brussels) have become the driving force of the euro zone and, by extension, of the EU as a whole. Broad political power is thus shifting from the supranational European institutions and towards national governments thanks to the euro crisis. Yet at the same time, many more intrusive powers are being vested at the EU level, because the euro zone has been forced to move in the direct of greater political as well as economic integration". This conundrum birthed the plethora of problems the EU faced during the financial crisis, migration crisis, and reemergence of nationalism within Europe. As power moved away from the egalitarian EU bodies towards national leaders who could navigate the 2000s financial crisis (especially Angela Merkel).

The supposed safety of being in the Euro dissolved as countries like Greece's insolvency raised fears of contagion to countries like Portugal, Ireland, Italy, and Spain. Just like a run on the banking system, markets could not properly evaluate nation state's balance sheets. Unfortunately, nations could not react on an individual level. "If you have an exchange rate, you can move your brush back and forth. If you don't have an exchange rate, you have to move the whole house," says Nemat Shafik, deputy managing director of the International Monetary Fund(IMF). The typical method of dealing with various crises that arose was some combination of German and French influence in treaty negotiations, development of new financial oversight boards/mechanisms, and use of the Bundesbank as a stopgap measure.

The supposed safety of being in the Euro dissolved as countries like Greece' insolvency raised fears of contagion to countries like Portugal, Ireland, Italy, and Spain. Just like a run on the banking system, markets could not properly evaluate nation state's balance sheets. Unfortunately, nation's could not react on an individual level."If you have an exchange rate, you can move your brush back and forth. If you don't have an exchange rate, you have to move the whole house" -Nemat Shafik-Deputy managing director of the IMF(66). The typical method of dealing with various crises that arose was some combination of german and french influence in treaty negotiations, development of new financial oversight boards/mechanisms, and use of the Bundesbank as a stopgap measure.

In summary, Germany takes on a disproportionate role in shaping the union, much of closer integration becomes reactionary to crisis after crisis, forces outside of the official institutional structures European Commission, European Parliament, European Court of Justice, European Central Bank, and Council of Ministers exert their own influences. This book also appropriately highlighted Britain's on-again-off-again relationship with the Euro and presents a background to the demand for the referendum on its EU status (the book is written before the result of Brexit was known).

Future issues include:

1. At Franco-German summit at Deauville where Germany agreed to a crisis-resolution system for the EU, under the condition that in future bail-outs, bondholders would have to bear part of the pain (private-sector involvement). We are just now seeing this in the handling of Italy's banking crisis.
2. Germans refuse to issue EuroBonds because it would mean Germans guaranteeing other country's debt at the expense of German taxpayers.   
3. "Countries that accede to the European Union are now legally required by their accession treaties also to join the euro (something that would apply, incidentally, to an independent Scotland)".
4. Need for more democracy in the development of a federal European government.
5. Banking sectors: "cross-border lending to banks and sovereigns grew fast, but retail lending remained Balkanised in national markets. Cross-border ownership of banks grew only slowly. Mergers and acquisitions tended to happen within a country's borders, a sign of strong economic nationalism in the banking sector".

Additional insights:

1. As an American, I did not realize the extent to the east-west divide, "one reason was the panic in France over the supposed threat of the 'Polish plumber'".
2. The G20 really emerged out of the financial crisis in 2008.
3. The troika, that was so influential in dealing with Greek and other Pig bailouts, consisted of the IMF, the European Commission, and the European Central Bank. The IMF's involvement highlighted the inability of Europe to handle the crisis solely by internal means.
4. France's rationale for letting the Greeks into the Union despite their clear inability to reach the above-mentioned criteria for entry can be summed up by President Valery Giscard d'Estaing, who said "one does not say no to Plato". This to me further highlighted the disproportionate role of France and Germany in making... and breaking the rules.
5. "The idea that a small group of countries might go faster than others had been floated as fast back as the 1970s by Leo Tindemans. Rather than always being forced to go at the pace of the slowest, a "hard core" of countries might move ahead with deeper integration, letting backmarkers catch up later (or perhaps not at all)".
6. The book did not touch on the immigration from Northern Africa or the Middle East. Yet, the Schengen Zone and refugee crisis has vastly altered the political landscape from Brexiteers wanting to reduce aid to migrants to terror attacks in France and Germany.