6 replies on “Eichengreen suggests some light reading”
Having sat out (officially, but not really) the conflict that defined the European project, having remained aloof in economic isolation and squalor during the ’50s when the foundations were laid and, by virtue of location and history, being grudgingly in tune with the Anglo-Saxon mindset, Ireland is ill-equipped in every respect to engage with the EU’s, ostensibly unachievable, but vitally necessary espousal of competition, co-operation and solidarity.
It is supremely ironic that, on the day after the Government finally responded to the long-required package of support being offered by the EU and the IMF, Irish politicians decided to display, in the full glare of the international media, the anachronistic and gloriously dysfunctional factional nature of the Irish political system.
It is interesting that an economist like Eichengreen emphasises the political rationale for European integration and, by proxy, the creation of the Euro. I suspect it is this kind of idealistic thinking that has led the EZ into crises in the first place.
If the lessons of the 20th Century are the ultimate reason of the European and Euro project, then the EU is guilty both of over-reach and of putting the cart before the horse.
It is guilty of overreach, because it will never be possible to integrate 15 or 27 states into a federal union, a fiscal union or even a full monetary union. This type of federalist project might have worked well with the original 6 members of the EEC (with the possible exception of Italy), but once the EEC began to expand, it lost all possiblity of ever deeper union.
It is guilty of putting the cart before the horse, because it conducted a grand experiment in currency union without preparing the way with even limited fiscal and regulatory union.
And now, because of the fallout from the various crises, either all EZ states will be dragged kicking and screaming into regulatory and partial fiscal union, or else the EZ will disintegration causing the mother of all financial crisis.
If you wish to understand what the EU is about, how it got here and possibly where it is going I highly recommend Anand Menon’s book about the EU – see link to review in the FT
Rarely does an academic have the privilege of a real-time test of his hypothesis. With the benefit of that test, I would now say that I was both right and wrong. I was right in that, yes, if the Greek government were to announce tomorrow that it had decided to reintroduce the drachma, it would precipitate the mother of all financial crises. Everyone would know that its intention was to depreciate the new drachma, so in the first minute everyone would rush to get their money out of the country, out of its banks, and out of its bond market. The result would be the biggest bank run and financial crisis the world has ever seen. This danger is a formidable deterrent to even contemplating going down this road. So I think the argument I made in 2007, that attempting to exit the euro area would be the equivalent of burning down your own house in order to find a way out, was exactly right.
In what way were you wrong?
I was wrong in that, as Paul Krugman observed earlier this year, if the house is burning down anyway, then the normal advice not to play with matches loses much of its force. If there’s a run on your banking system anyway, then the deterrent to action no longer applies. If there’s a run on your banking system and you have to close down your banks and financial markets anyway, you may want to take that opportunity to reintroduce your own currency. I still don’t think that things will be allowed to get to this point, but I no longer attach a zero probability to a country’s exiting the euro – just a close to zero probability. Never say never, but I still believe that the euro is an example of a path-dependent historical process that is unlikely to be reversed.” B. Eichengreen
This passage caught my attention. At a time of big choices …
6 replies on “Eichengreen suggests some light reading”
Having sat out (officially, but not really) the conflict that defined the European project, having remained aloof in economic isolation and squalor during the ’50s when the foundations were laid and, by virtue of location and history, being grudgingly in tune with the Anglo-Saxon mindset, Ireland is ill-equipped in every respect to engage with the EU’s, ostensibly unachievable, but vitally necessary espousal of competition, co-operation and solidarity.
It is supremely ironic that, on the day after the Government finally responded to the long-required package of support being offered by the EU and the IMF, Irish politicians decided to display, in the full glare of the international media, the anachronistic and gloriously dysfunctional factional nature of the Irish political system.
It is interesting that an economist like Eichengreen emphasises the political rationale for European integration and, by proxy, the creation of the Euro. I suspect it is this kind of idealistic thinking that has led the EZ into crises in the first place.
If the lessons of the 20th Century are the ultimate reason of the European and Euro project, then the EU is guilty both of over-reach and of putting the cart before the horse.
It is guilty of overreach, because it will never be possible to integrate 15 or 27 states into a federal union, a fiscal union or even a full monetary union. This type of federalist project might have worked well with the original 6 members of the EEC (with the possible exception of Italy), but once the EEC began to expand, it lost all possiblity of ever deeper union.
It is guilty of putting the cart before the horse, because it conducted a grand experiment in currency union without preparing the way with even limited fiscal and regulatory union.
And now, because of the fallout from the various crises, either all EZ states will be dragged kicking and screaming into regulatory and partial fiscal union, or else the EZ will disintegration causing the mother of all financial crisis.
If you wish to understand what the EU is about, how it got here and possibly where it is going I highly recommend Anand Menon’s book about the EU – see link to review in the FT
http://www.ft.com/cms/s/2/e978e48e-43e9-11dd-842e-0000779fd2ac.html#axzz167NypVVv
@KO’R
“What’s your view now?
Rarely does an academic have the privilege of a real-time test of his hypothesis. With the benefit of that test, I would now say that I was both right and wrong. I was right in that, yes, if the Greek government were to announce tomorrow that it had decided to reintroduce the drachma, it would precipitate the mother of all financial crises. Everyone would know that its intention was to depreciate the new drachma, so in the first minute everyone would rush to get their money out of the country, out of its banks, and out of its bond market. The result would be the biggest bank run and financial crisis the world has ever seen. This danger is a formidable deterrent to even contemplating going down this road. So I think the argument I made in 2007, that attempting to exit the euro area would be the equivalent of burning down your own house in order to find a way out, was exactly right.
In what way were you wrong?
I was wrong in that, as Paul Krugman observed earlier this year, if the house is burning down anyway, then the normal advice not to play with matches loses much of its force. If there’s a run on your banking system anyway, then the deterrent to action no longer applies. If there’s a run on your banking system and you have to close down your banks and financial markets anyway, you may want to take that opportunity to reintroduce your own currency. I still don’t think that things will be allowed to get to this point, but I no longer attach a zero probability to a country’s exiting the euro – just a close to zero probability. Never say never, but I still believe that the euro is an example of a path-dependent historical process that is unlikely to be reversed.” B. Eichengreen
This passage caught my attention. At a time of big choices …
good list
Excellent post – his views carry real authority.