How Europe Ended Up Someplace Else - Ashoka Mody EuroTragedy: A Drama in Nine Acts
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How Europe Ended Up Someplace Else
Ashoka Mody
EuroTragedy: A Drama in Nine Acts
New York: Oxford University Press, June 2018
Thesis: monetary union would lead Europe into political union.
Early warnings it would not.
• Nicholas Kaldor, March 1971:
o Single currency would amplify economic divergence, and
o A house “divided against itself cannot stand.”
• Robert Marjolin, crucial catalyst of Treaty of Rome, in the 1970s:
o Political efforts to counteract economic divergence would be
impeded by the sovereignty barrier:
o European leaders “obviously not ready” to give up core
sovereign functions;
o Change required was “too profound.”
A flawed euro, which the French desperately wanted, on German terms.
• Chancellor Helmut Kohl—despite
severe initial misgivings—pushed the
euro, overriding German public’s
deep opposition to giving up the
deutsche mark
• Seeking the Bundestag’s
authorization on April 24, 1998, he
twice said:
• “According to the treaty rules, the
community shall not be liable for the
commitments of the member states
and there are no additional financial
transfers.” Translation: Germany will
not pay the bills of other member
countries.
• Kohl’s mantra: euro would ensure
Europe’s peace.
But there was no conception of what the end goal was
…and, hence, no idea of how Europe would get there.
“If you don’t know where you are
going,
You'll end up someplace else.”
Yogi Berra
The tragedy: the euro inevitably
pushed Europe into a “someplace”
else that was not good.
Kaldor’s ghost stalks: The euro divides Europe
The great divergence in euro-area incomes and employment.
Per capita incomes Unemployment rates
(In thousands of US dollars, corrected (Percent)
for purchasing power parity)
50 13
48 12 Italy
Germany
46 11 France
10
44
9
42
France 8
40
7
38 6
Italy Germany
36 5
34 4
2003 05 07 09 11 13 15 2003 05 07 09 11 13 15
Sources: Conference Board, “Total Economy Database (Adjusted Version),” http://www.conference-
board.org/data/economydatabase/; IMF, World Economic Outlook Database,
https://www.imf.org/external/pubs/ft/weo/2017/01/weodata/index.aspx.
The euro-area north-south divergence: public debt and youth distress.
Public debt Youth unemployment and inactivity
Italy 2007 2007
2017 2016
Greece 2007 2007
2017 2016
Spain 2007 2007
2017 2016
France 2007 2007
2017 2016
Portugal 2007 2007
2017 2016
Finland 2007 2007
2017 2016
Austria 2007 2007
2017 2016
2007
Germany 2007 2016
2017
2007
Netherlands 2007 2016
2017
0 5 10 15 20 25
0 50 100 150 200
Percentage of population
Public debt as a
15 to 29 years old
percentage of GDP
Inactive Unemployed
Source: IMF, World Economic Outlook Database; Eurostat (edat_lfse_20). Note: Countries on the left side
correspond to the countries on the right side. The “unemployed” are those who are looking for a job but are unable
to find one; the “inactive” are not looking for a job and neither are they in an educational or training program. The
sum of the unemployed and inactive is known as “neither in employment, education or training” (NEET).
Divergence was predictable, not an accident: southern euro area suffers
from weak governance and institutions, which weaken growth potential:
The euro is cruel on countries with low growth potential.
Italy 1998
2015
Greece 1998
2015
Spain 1998
2015
France 1998
2015
Better governance
Portugal 1998 and institutions
2015
Finland 1998
2015
Austria 1998
2015
Germany 1998
2015
Netherlands 1998
2015
0,0 0,5 1,0 1,5 2,0 2,5
Source: World Bank, Worldwide Governance Indicator. Note: The overall index presented is an average of
measures of government effectiveness, regulatory quality, rule of law, and control of corruption. Each individual
measure is normally distributed, with a mean of zero, a standard deviation of 1, and an approximate range of –2.5
to 2.5. Larger values indicate better governance.
Poorer long-term growth prospects a trap: persistently low R&D rates in
the euro-area periphery, hence persistently low growth potential.
(R&D as a percentage of GDP, 2016 versus 1997)
3,5 Sweden
Austria Germany
R&D/GDP ratio (percent) in 2016
3
Denmark
Finland
2,5 United States
Belgium
France
2 Netherlands
United Kingdom
1,5 Italy
Portugal
Spain Ireland
1 Greece
0,5
0
0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5
R&D/GDP ratio (percent) in 1997
Source: OECD Statistical Database.Predictably, German exporters shift their sights away from the euro area.
(Percent of total German exports to the various countries)
12
France Czech Republic,
Hungary, and Poland
10
8
United States
6 Italy
4
China
2
0
1999 2007 2016
Source: IMF Data, http://data.imf.org/regular.aspx?key=61013712.
Undercuts the idea that the euro would promote trade and, hence,
growth.Kaldor’s ghost stalks also the eurozone’s
politicsItalians lost trust in Europe: economic wounds left political scars.
(Decrease in percentage of respondents who trust the European Union, 2016 relative to 2001)
Italy France Germany
0
-5
-10
-15
-20
-25
-30
-35
-40
Source: Standard Eurobarometer survey, available at http://zacat.gesis.org. Note: Respondents answered the
following question: “I would like to ask you a question about how much trust you have in certain institutions. For
each of the following institutions, please tell me if you (Tend to trust it; Tend not to trust it): The European Union.”
The chart presents the change in share of people who said they trusted the EU. For each year, 2001 and 2016,
responses for the two available quarters are averaged.“European chancellor” Merkel held eurozone together:
Became polarizing force.
• In Italy, February 2013 election:
o Rise of the anti-euro Five Star
Movement
o Silvio Berlusconi, whose party also
performed well, asked at his rallies,
“Do you want a government that that
is subject to the diktats of Europe?”
o Pro-European Mario Monti
Between 2010 and 2016, Merkel electorally humiliated.
was de facto European • In Germany, starting in 2012:
chancellor, a goal that Kohl had o Breakaway group from Merkel’s
dreamt of. Christian Democratic Party (CDU)
Ipso facto, she became a formed Alternative für Deutschland,
politically polarizing figure, initially as an anti-euro party and
dividing Europe. then as an anti-immigrant party.Looking ahead: The future ain’t what it used to be
For now, Greece has lost its democracy.
• Failure to provide substantial
and upfront debt relief implies
o Large primary surpluses
o Historically hard to
maintain
o Will constrain
government investment
o Keep growth low
• More seriously
o Greek parliament will
mainly rubber-stamp
decisions made in Berlin,
Brussels, and Frankfurt.The ECB has reached its political limits
ECB tardy in initiating bond purchases:
Euro-area inflation rate began dropping in mid-2013, delivering the
lowflation wound.
(Three-month moving average of “core” annual inflation rates, percent)
2
1,8 United States
1,6
1,4
1,2
Euro Area
1
0,8
0,6
Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun
2012 12 13 13 14 14 15 15 16 16 17 17 18
Source: Eurostat: “HICP—All Items Excluding Energy and Food”; St. Louis Fed, FRED: “Personal Consumption
Expenditures Excluding Food and Energy (Chain-Type Price Index).”The ECB keeps forecasting a rise in inflation:
Inflation remains stubbornly low.
2017 forecast
1,8 2013 forecast 2015 forecast
2014 forecast
2016 forecast
1,6
1,4 2018
forecast
1,2
1,0
Solid line is
the actual
0,8
euro-area
core inflation
0,6
2012 13 14 15 16 17 18 19 20
Sources: ECB’s Macroeconomic Projections made in March of the year,
https://www.ecb.europa.eu/pub/projections/html/index.en.html.
Note: 2018 core inflation is the average of months January to September 2018.The ECB lacked commitment to bond purchases, even more so than the
Bank of Japan.
Depreciation relative of the dollar
February 1, 2016
150 Start of quantitative easing
January 4, 2013: Bank of Japan July 1, 2016
140 January 22, 2015: ECB Taper
talk JPY/USD
130
120
EUR/USD
110 October 24, 2017: ECB begins tapering QE
100 June 14, 2018: ECB announces
QE end date as end-2018
90 Taper talk
January 1, 2017 September 15, 2017
80
-100 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 1400
Number of days from the quantitative easing announcement
Note: Exchange rate for JPY/USD equals 100 on January 4, 2013 (date of the announcement of quantitative easing by the Bank of
Japan) and exchange rate for EUR/USD equals 100 on January 22, 2015 (date of the announcement of quantitative easing by the
ECB).
Source: For USD and Japanese Yen, https://www.investing.com/currencies, for USD and Euro rates ECB,
https://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=120.EXR.D.USD.EUR.SP00.A&periodSortOrder=ASC.World trade rather than ECB’s bond purchases moves eurozone growth.
(Annual growth rates, percent; three-quarter moving averages)
7 World trade
Germany industrial production
6 France industrial production
Italy industrial production
5
ECB bond purchases in
4 flow from March 2015, but
unable to raise economic
3
2
1
0
-1
Aug Nov Feb May Aug Nov Feb May Aug Nov Feb May Aug
2015 15 16 16 16 16 17 17 17 17 18 18 18
Source: For world trade growth data World Trade Monitor, https://www.cpb.nl/en/data; for the industrial
production of Germany, France and Italy Eurostat, code [sts_inpr_m]. Note: The three-month average of growth
over the same three months in the previous year.Italy: theater of EuroTragedy
Italy needed—and needs—the crutch of a depreciating
currency to offset its abysmal productivity growth.
The depreciating lira Italian productivity fell relative to German
(Number of liras for one D-mark) (annual total factor productivity growth)
2,5
1400
1200 2,0
1000
1,5
800
600 1,0
400
0,5
200
0 0,0
1970
70 74 78 82 86 90 94 98 1970-79 1980-89 1990-98
Italy Germany
Italian productivity collapsed while even
US Dollar/Euro exchange rate is back where it
German fell behind the U.S.
began, 1999-2018
(annual total factor productivity growth)
1,6 0,8
1,5 0,6
1,4 0,4
1,3 0,2
The euro's
starting 0,0
1,2
exchange 2008-08 2009-16
-0,2
1,1 value
-0,4
1
-0,6
0,9
-0,8
0,8
Italy Germany United States
99 02 05 08 11 14 17
1999
Source: Top left panel: Banca d'Italia, https://tassidicambio.bancaditalia.it/timeSeries; top right
panel: ECB data warehouse
https://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=120.EXR.D.USD.EUR.SP00.A&period
SortOrder=ASC; bottom left and right panels: The Conference Board, https://www.conference-
board.org/data/economydatabase/index.cfm?id=27762.Young college-educated Italians leave Italy in growing numbers.
30 16
Share of 25 to 34 years-olds among migrants
Number of college-educated migrants older than
14 25-34
Share of 25 to 34
25
year-olds among
12 migrants with
college degrees
with college degrees
20 (right)
10
25 (thousands)
Number of college
15 8 graduates leaving
Italy (left)
6
10
4
Number of college
5 graduates returning
2
to Italy (left)
0 0
2002 04 06 08 10 12 14 16
Source: Italian National Institute of Statistics.
Italy's low growth trap: poor opportunities, the educated leave, R&D remains
weak, and opportunities remain poor.Italy’s financial problems:
The government-bank “doom loop,” always latent, has remerged.
4,0 1,2
3,5
1,1
3,0
1,0
2,5
Government bond yield
(left, percent)
0,9
2,0
Financial sector performance
(right, index)
1,5 0,8
Jan Feb Mar Apr May Jun Jul Aug Sep Oct
2018 18 18 18 18 18 18 18 18 18
Sources: FTSE Italia All-Share Financial Index: Global Financial Data, ticker IT8300 Index; FTSE Italia All-Share
Index: Global Financial Data, ticker FTSEMIB Index; Italy ten-year bond yield: Datastream International, code
S310DT. Notes: The graph presents the relative performance of financial stocks and the Italian 10-year bond yield
from 2 January 2015 to 18 September 2012. The relative performance of financial stocks for Italy is the ratio
between the FTSE Italia All-Share Financial Index and FTSE Italia All-Share Index.Sovereignty barrier remains as strong as
everThe myth of Franco-German friendship.
At the December 2012 European Council, Herman Von Rompuy proposed a eurozone budget. Merkel asked, “Where will the money come from?” French president François Hollande helpfully suggested to Merkel that she think of it as a “solidarity fund.” Again, Merkel coldly asked, “And where will the money come from?”
The search for a savior.
How the saviors fall:
Matteo Renzi and Emmanuel Macron approval ratings.
(Approval ratings, percent)
70
60
50
Matteo Renzi
40
Emmanuel Macron
30
20
10
maj 2014 maj 2015 maj 2016 maj 2017 maj 2018
maj 2017 maj 2018 maj 2019 maj 2020 maj 2021
Source: Ipsos polls for Matteo Renzi, www.ipsos.it; Ifop for Emmanuel Macron, https://www.ifop.com/wp-
content/uploads/2018/08/Indices-de-popularit%C3%A9-Ao%C3%BBt-2018.pdf.
Note: Percent "Don't know" excluded.There are no saviors.
Europe: a declining continent for over a century:
The future does not look much better, as Asia surges ahead.
(US patents granted annually to companies in different countries, numbers in thousands)
18
Republic of Korea
16
14
12
Germany
10
8
China
6
4 France
2 Italy
0
1995 97 99 01 03 05 07 09 11 13 15
Source: World Intellectual Property Statistics Database, https://www3.wipo.int/ipstats/index.htm.The warnings were sounded. It need not have been. It almost was not. The rest followed. It could get worse, a lot worse. • The euro has hobbled many of its member countries. • It has created bitter political division among Europeans. • If Aristotle were alive today, he would see how “eminently good and just” men and women enacted the EuroTragedy, “not by vice or depravity,” but by “error or frailty.”
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