Sic et Non

Uncertainty, perplexity, ambivalence. I'm pretty sure this is where it's at.

Voices in the EuroWilderness, Pre-Crisis

John Gillingham, professor of history at the University of Missouri (he teaches Modern European Economic History and The History of European Integration, inter alia, and has written extensively on EU matters) published Design for a New Europe in 2006 (Cambridge University Press), which includes a scathing critique of EU institutions and practices and some proposals for reform. This is what the book said then about the Eurozone:

The EMU … is intrinsically unstable. The burning question of the hour is, What will happen once bondholders start worrying about the “full faith and credit” of a state that has never existed and likely never will? The threat of financial panic must be dealt with immediately. (…)
The euro need not be taken out of circulation but can instead be allowed to find its value in competition with restored national currencies. Individual countries should have the choice of opting into or out of Euroland or of using both domestic and European currencies concurrently. (…)
Adoption of [a one-size-fits-all monetary] policy was like using a single thermostat to regulate temperatures at the same time in both Lisbon and Helsinki. … The euro is also of particular benefit to ill-managed member economies, whose credit ratings it artificially boosts. (…)
The credibility of the euro depends on little more than the self-restraint of the national governments. In other words, there is good reason to worry about currency instability. (…)
In early 2004, financial experts from Goldman Sachs and Morgan Stanley started recommending that buyers take heed of the “country factor” when purchasing Eurobonds. (…)
No provision was made for exit from the EMU on the theory that it should more painful to leave than to stay in, even if a bailout of some kind should become necessary. If such a rescue operation should fail, a distressed country could leave the EMU and simply remonetize back into a reissued national currency. This action would almost surely entail a partial de facto default, because the new issue would necessarily be weaker than the euro. … If several economically ailing countries should have to leave the EMU at the same time, the big G-8 powers would, however, have to rescue and reform or – in a crushing blow to “Europe’s great experiment in transnational governance” – liquidate it.

Then, in May 2009, exactly one year before the first Greek bailout, the Economist Intelligence Unit published a brief on Greece, stating:

We expect the deficit to rise further to 5% of GDP in 2009, before easing moderately to 4.8% of GDP in 2010 and 3.3% of GDP by 2013. Greece’s high deficit and public debt will adversely affect international confidence in the Greek economy. Although not our central scenario, there is a risk of Greece defaulting on its long-term bonds during the forecast period. If this happens, Greece would seek support from the IMF and the EU, both of which would force tough austerity measures.

[Note that the deficit turned out to be more than 3 times higher than expected, which is probably why that was not their “central scenario”.]

Retrospectively, it is very interesting to see how much of what has transpired in the last couple of years was actually predictable. None of this just fell out of the sky, but the public was unaware of the situation and the potential risks. This is, I think, one of the reasons we’ve been having unrealistic, quasi-metaphysical debates about things that have very concrete historical roots and causes. It is always very difficult to understand what’s happening if you don’t understand what’s happened.


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