The European crisis has brought about several discussions and reviews of the history and politics of the European Union and mainly the European Monetary Union (EMU). The two books reviewed present different views of the future of the EMU and the challenges faced by the European citizens.
The Euro Crisis and Its Aftermath provides a balanced mix of history, politics, and economics of the European Union and the EMU. The book is written for anyone concerned about the European difficulties after the crisis, the Union's future. The author wants to address the question of unity among European citizens and after going through a detailed analysis of the past and present situation he leaves the reader to choose among possible solutions.
The book comprises four main sections. Part one provides an overview of the European currency and the steps taken to its creation. The author reviews the experience of monetary integration back to the nineteenth century and how we arrived at the Euro's creation. The reasons for adopting the Euro are well understood by economists: behavioral—looking for stable exchange rates; logical—giving up the independent monetary policy in order to have stable exchange rates and free capital movements; and political—a belief in the further integration in Europe. The monetary union is the outcome of Germany wanted to keep its supremacy and being worried about other countries not being ready to adopt the needed monetary discipline. The Stability and Growth Pact (SGP) was intended to ensure fiscal discipline but was criticized for its excessive rigidity. The loss of monetary policy implies that fiscal policy should assume greater importance but, unfortunately, fiscal policy is not a good substitute for monetary policy. Enforcing discipline has been very complicated and led countries to strengthen the SGP. The author claims that the euro did not enhance cooperation as expected and so each country was left alone to cope with the challenges and risks that the common currency was bringing about.
Part two studies the first decade of the Euro and investigates the history that led to the crisis. The Euro's first decade shows the difference between the “saving” North and the “consuming” South. Stability is needed in both the public and private sectors. Greece and Portugal did not pay much attention to the public sector, whereas Spain and Ireland gave considerable freedom to the private sector. Other countries (most notably, France and Italy) lost competitiveness during these years, leading to decreased growth. Few predicted the looming catastrophe. The author stresses the formal warning that France and Germany received in 2003. However, both countries responded by requesting a reform of the SGP. Romano Prodi, then EU Commission President, remarked that “I know very well that the Stability Pact is stupid, like all decisions which are rigid” (Le Monde, 17 October 2002). Nothing came of these efforts. The lack of oversight and inefficient banking supervision led to the financial crisis that hit Europe after 2008.
Part three describes the policies the European policy makers adopted since the crisis. Special attention is given to the creation of the European Financial Stability Facility (EFSF) nowadays the European Stability Mechanism (ESM). This institution, founded in 2010, was conceived as a source of financial assistance to member countries that had lost access to capital markets due to excessive government deficits and debts. Equally important is the idea of debt restructuring—how to modify the terms of a loan to provide relief to the debtor country and reduce the risk that it defaults on its payments. Reaching an agreement among Europeans was very difficult, and the solutions led to increasing market turbulence. Furthermore, the European Central Bank (ECB) did not pay enough attention to the developments in the banking sector. If the ECB had stood ready to buy government bonds without hesitation, it would have avoided the lack of confidence in the euro in the markets. Readers are also likely to assess the possibility of exiting the Euro as it looks like a simple and straightforward answer to the crisis. The legal, technical, economic, and financial complications of this strategy are, on the hand, considerable. Costs of leaving the euro-area would be extremely high and the author considers that “the breakup scenarios do not look appealing.”
Part four revises the policy agenda and leaves the door open for future options. Although there are some signs of recovery, the crises have left “lots of injured banks, wounded households and struggling companies” to be fixed. The author considers the creation of a banking union, but notes that it may not be enough to solve the systemic weaknesses present in the Euro area. Another possibility would be the creation of a EU budget that would reduce fragility and work as an insurance mechanism, providing more risk-sharing. The European model was built under the assumption that crises would not occur. Hence when the bubble burst, the European policy system failed. To solve this institutional problem, the author suggests creating a federal model. It is clear that the European crisis has opened a “true constitutional debate” with different South versus North approaches to be considered.
After a good presentation of the development of the European financial crises, there is no clear answer on how to solve the problems they have created. It is left to Europeans, to find the best solution.
Economic Policy Coordination in the Euro Area is a good complement to The Euro Crises and Its Aftermath. The crises have demonstrated that there is a need for deeper integration at the political level. The author questions the need for political union and economic policy coordination. He stresses the existing and potential economic coordination (fiscal, monetary, and wage coordination), and the incentives they create from the perspective of institutional economics.
The book is organized in six chapters. Aside from an introductory overview where the author explains the state of the art and a brief concluding summary, the four chapters left make up the core of the book. Chapter 2 provides an empirical review of macroeconomic heterogeneity that reveals the need for economic coordination. The author suggests that by reducing heterogeneity in economic development there will be an increased convergence among the Euro area countries.
Coordination takes several forms. Vertical coordination refers to the degree to which policies are binding at different levels, while horizontal coordination refers to cross-border and cross-policy matters. Given that the existence of heterogeneity in the Euro zone is not the only reason for the need for coordination, the author examines other factors. Cross-border externalities and European-level public goods provide compelling reasons for coordination.
All this analysis leads the author to investigate the coordination mechanism in the Euro area prior to the sovereign-debt crisis. Until then, the strongest form of coordination was centralized monetary policy. The ECB only bears the responsibility for monetary policy. This form of centralized coordination did not take into account the disparities among member countries. Moreover, coordination was unable to internalize the externalities that arise from strong asymmetries between the EU institutions and its actors. The SGP that coordinates fiscal policies in the European Union acted as a hard, cross-border form of coordination. Too much attention was paid to the public debt and it failed “to consider other reasons for negative cross- policy externalities and bailout risks.” All in all the author claims that there was a general failure of coordination policies in the Euro area and so, the financial crisis revealed the fragility of the EMU institutions.
After the crisis, there has been an expansion of coordination in the EU. If we look at fiscal policy, first we observe that after several reforms the SGP succeeded in internalizing the externalities. However, the question remains whether the sanction mechanism will be sufficient in reducing the debt. Therefore, the need for other fiscal reforms is still present. Possible suggestions are debt brakes, state insolvency procedures and Eurobonds. These suggestions highlight the need for political union, without which these new fiscal coordination mechanisms seem unlikely. The author asserts that all these “farther-reaching” forms of coordination are better in a unitary state than in a federal system. However, and given that the EU is a mix of federal and union systems, all these fiscal elements can potentially work in the EU. When looking at cross-policy coordination, we observe a movement towards monetary and fiscal policy working together through the purchase of government bonds. The author uses quantitative evidence to inform us about all the variables to be considered for the macroeconomic monitoring. Moreover, he presents the objectives of the EU (The Europe 2020 Strategy, The European Semester, The Euro-Pact Plus) always keeping in mind the need of EU-level coordination.
In regards to wage-policy coordination, the existence of many different wage-setting systems among member countries makes coordination practically impossible. The idea of having a common EU wage policy seems questionable due to institutional barriers and disincentives. The countries' individual preferences are the result of their institutional historical development. What works well in one country may not in another.
The author has written a valuable study on the need of policy coordination in the Euro area. Particularly if read in conjunction with The Euro Crises and Its Aftermath, this work should provide scholars with a new institutional oriented approach to these important times in the European Union history.
