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The lessons of history

14 August 2015 By Edward Hadas

Swashbuckling cavaliers disappeared from European politics long ago. Even the age of eloquence seems past. But great things can be made out of the dull ingredients of modern diplomacy: meetings, position papers and fuzzy compromises. As Valerie Caton shows in her new book, “France and the Politics of European Economic and Monetary Union”, the euro is a prime example.

Caton, a retired British diplomat, chronicles what amounts to a slow capitulation by a series of French and German governments. The French of both left and right treasured national political control of economic and monetary policy. The Germans were equally united in their commitment to an independent central bank which was purely German.

But by 1996, the two countries had agreed to a European monetary authority which would be free of all government influence. The euro followed. By 2012, the two countries had broken almost all their previous principles, and encouraged or at least allowed the European Central Bank to bend its rules, to keep Greece from falling out of the euro zone.

What happened? Caton gives a brisk and clear chronological summary of the decades of position papers, election campaigns, summits and high-level committees. She goes beyond her French focus to describe the infighting between the German Bundesbank and the country’s more European-minded politicians.

She shows that at almost every stage from the 1970 Werner report to the August 2011 Franco-German agreement on the creation of a “veritable government of the euro zone”, the whole project looked implausible at best. However, the momentum behind the single European currency proved irresistibly strong.

There were some pragmatic calculations. The economic and financial worlds had become too international for any national government to go it alone. French President Francois Mitterrand turned to Europe in the 1980s after his nationalisations and government push failed to vivify the economy. Germany ultimately preferred to bind its biggest trading partners into a single currency than to deal with disruptive devaluations.

There was also what might be called Europe’s destiny. Again and again, the leaders of France and Germany felt compelled to move as far away as possible from the chaos of the first half of the century. They considered the political goal of European unity to be more important than any disagreements about interest rates or fiscal policy.

The French were determined to show that they were good enough Europeans to keep up to German standards of fiscal rectitude. The Germans were sufficiently community-minded to countenance French ideas about sharing control of government economic policies. Countries such as Italy, with a tradition of high fiscal deficits, were willing to change to stay inside the European mainstream.

The financial and Greek crises have shown that the curious mix of pragmatism and idealism has not worked perfectly. European leaders were so anxious to create a shared currency that they did not worry about the inability of the euro’s governing structures to deal with the problems of weak members in hard times. A more cautious approach might not have helped. As Caton points out, before the 2008 financial crisis few economists paid much attention to what turned out to be the greatest challenge to the euro, the toxic interaction between national governments and their banks.

Still, the lessons of the euro’s history remain relevant. The Greek government of Prime Minister Alexis Tsipras has discovered that there is no realistic alternative to following its creditors’ orders, while the Germans have consistently chosen compromise over dogma, for the sake of the euro.

The euro story is not over. Many economists argue that the internal contradiction of tying national governments to an international currency is unsustainable. Some political observers argue that as the memory of World War Two fades, the willingness to compromise on national sovereignty will also decline. Without more fiscal unity, the next crisis could well doom the currency.

However, Caton’s tale suggests a more positive reading of the direction of history. At each step, it seemed easier or less embarrassing to go forward than backward. Now that the euro is in place, the political and economic costs of dismantling it are higher than ever. The euro may be doomed to succeed.

 

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