The Euro Debate and the Abuse of Language

Defenders of the Eurozone’s initial design, subsequent management and purported reform invariably refer to the system as a ‘monetary union’. So do academic commentators including the authors of the recent Vox piece on the origins of the crisis. Whether intended or unconscious, this is an abuse of language.

Monetary unions do not experience selective bank closures, the re-introduction of exchange controls or the numerous other manifestations of financial fragmentation that have occurred before and after the Eurozone ‘reforms’. Germany is a monetary union. In 1974 the Herstatt Bank collapsed in Cologne and several banks based in Dusseldorf went down in the recent crisis. Both cities are in Nordrhein Westfalen, but there was no closure of bank branches in the state nor were exchange controls introduced by the state authorities on either occasion. Interest rates in Nordrhein Westfalen did not detach from rates elsewhere in Germany nor did bank deposits flee the state.

When the Continental Illinois Bank went under in 1984, at the time the largest-ever US bank failure, the state of Illinois was not expected to handle the fall-out. In the recent crisis the state of Delaware, home to lehmans, and the state of North Carolina, home to Wachovia, were similarly spared. The USA is also a monetary union and there is federal responsibility for bank supervision, bank resolution and the protection of bank creditors.

The Eurozone in contrast was established in 1999 as no more than a common currency area, with a ‘central bank’ responsible only for monetary policy in the aggregate, in pursuit of an inflation target. To describe it as a ‘monetary union’ is to deny that there is any distinction between a common currency area and a monetary union. If the Eurozone really was a monetary union in 2008 the history of the crisis would have been very different.

Language matters. In his 1946 essay (Politics and the English Language) George Orwell put it like this:

‘The great enemy of clear language is insincerity. When there is a gap between one’s real and one’s declared aims, one turns as it were instinctively to long words and exhausted idioms, like a cuttlefish spurting out ink. In our age there is no such thing as “keeping out of politics.” All issues are political issues, and politics itself is a mass of lies, evasions, folly, hatred, and schizophrenia. When the general atmosphere is bad, language must suffer.’

The danger is that relentless description of the Eurozone as a monetary union deflects attention from the awkward truth that it is not, and from the political unwillingness to make it so.

It has finally happened

It was way back in April 2009 that Barry Eichengreen and I first compared the world industrial output collapses of 1929 and 2008. The situation looked pretty alarming at that stage, but it turned out that we were a good leading indicator of recovery: the world economy started turning around almost immediately afterwards, thanks to a coordinated reflationary macroeconomic policy response. Then 2010 happened, reflation turned to austerity in Europe, and the global recovery slowed, to the point where at times it seemed to be petering out almost altogether.

And in August of this year, the inevitable happened: measured in terms of industrial output, our current recovery was overtaken by that of the interwar period. Pretty dismal stuff. Let’s hope that we can at least avoid the famous 1937-38 double dip, visible at the end of the interwar series.



Exchange rates

Paul Krugman suggests that exchange rates might matter for economic performance here.

On Ireland and exchange rates, one could add that, because of our large trade exposure to non-Eurozone markets, we  benefitted from an unusually large nominal depreciation in 2014-15 (which translated into a substantial real depreciation) (slides 8 and 9 here). I doubt this is unrelated to the employment boom we have enjoyed since then.

The political aftermath of financial crises.


The Eurozone crisis: a “consensus narrative”

Courtesy of VoxEU, here.