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Saving Europe

Saving Europe: How National Politics Nearly Destroyed the Euro

Copyright Date: 2012
Pages: 405
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  • Book Info
    Saving Europe
    Book Description:

    Three times in the few years since the global financial crisis erupted, the euro has come close to extinction, endangering both the world economy and history's most ambitious project in shared sovereignty. Yet each tim e, the case for a common currency proved to be more compelling than its weaknesses, and the euro survived.Saving Europereveals how the nexus of international economics and national politics pushed monetary union to the brink of a breakup, how that disastrous development was avoided, and why the long-term viability of a common currency challenges politics as we know it.

    Carlo Bastasin reveals and analyzes what has been happening behind the scenes in European negotiations since the financial crisis began with the collapse of major financial institutions in 2008. He argues that the crisis in the euro zone actually has a political origin, having emerged from the self-interested abuses of national politics. Moreover, the crisis is reinforced even now by the obstinate defense of national prerogatives in politics and finance as well as by the lack of commitment for shared or supranational sovereignty. While the prevalent view is that monetary union was a flawed project from the start and is in need of amending, Bastasin shows that the failures have to do almost entirely with national opportunism -not only in Greece but in most countries, including Germany -and concludes that the crisis will lead to Europe's political union.

    Bastasin's work is an engrossing historical chronicle, interweaving moments of high drama with individual personalities on the world stage. German ChancellorAngela Merkel, French President Nicolas Sarkozy, and national and European central bankers, among others, play key roles.Saving Europeis also a rigorous attempt to make larger sense of what has happened in the euro zone and what might happen next. Given the central importance of Europe within the fragile world economy as well as growing speculation that the euro might disappear, this is essential reading for anyone trying to grasp international economics and politics. Just as important, it is a compelling tale of people, personalities, power, and money. There is no other book like it.

    eISBN: 978-0-8157-2197-0
    Subjects: Business, Economics

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-x)
  3. Prologue: Other People’s Eyes
    (pp. 1-14)

    In a matter of just a few years the euro area has been close to sinking at least three times: in September 2008, in May 2010, and in November 2011. Each time the existential reasons for the euro area have proven stronger than the weaknesses of the ship and the clumsiness of its command.

    For a long time the timid solutions to the crisis were dictated mainly by national fears and reciprocal mistrust. Then, by the end of 2011 national politics had reached its limits. European priorities dictated even the change of governments and new common policies prevailed. However, until...

  4. 1 The Origin of Mistrust
    (pp. 15-36)

    It did not either knock on the door, or crash the gate. In September 2008, the global financial crisis entered in Europe in silence and brought it to the brink of collapse in a surreal obscurity.

    While all the lights were focused on Wall Street’s bankruptcies shaking the world, Chancellor Angela Merkel entrenched herself behind a wall of silence as she saw Germany, hidden from public awareness, head toward the same financial meltdown, as one bank after the other risked crumbling before her eyes.

    On October 4, 2008, on the stairway of the Elysée Palais in the heart of Paris,...

  5. 2 The Secrets behind the Banks
    (pp. 37-56)

    For Jean-Claude Trichet, a lifelong experienced public official, the Lehman and the Hypo Real Estate events had been incredibly demanding. Although the U.S. financial system was the epicenter of the crisis, the European Central Bank (ECB) president knew that banks played a much more crucial role in the European economy than in the United States because they provided a much larger slice of credit to the economy. Moreover, he knew that banks were central to the web of national systems of power in the euro area member states, as the drama around HRE had shown. Still, Trichet was watching with...

  6. 3 Europe’s Awkward Ambitions to Change the World
    (pp. 57-72)

    The onset of the financial crisis in the United States offered a wonderful chance for the Europeans to change the financial system, to regulate globalization, and finally to make the world economy more respectful of the principles that they chose as basis for the European society: “pluralism, non-discrimination, tolerance, justice, solidarity” (as in article 2 of the Treaty on European Union). However, instead of promoting unity in Europe, the initial phase of the U.S.-induced crisis offered national leaders the best chance in decades to vaunt their personal primacy on the world stage and praise the nature of their national models....

  7. 4 Too Different for One Policy
    (pp. 73-86)

    The inability of European leaders to offer a collective answer to the crisis was not just a function of their competition to lead Europe, or the world. As the events at the end of 2008 show, it was also a consequence of the deep underlying differences in economic structure among their countries—differences that the introduction of the euro had magnified rather than narrowed. Differences among regions of an integrated area are not only normal, but even desirable, because they reflect the necessary specialization of each area. Inevitably the different activitites result in different levels of productivity and trade imbalances,...

  8. 5 First Doubts about the Euro
    (pp. 87-99)

    By the beginning of 2009, evidence had emerged that the financial crisis was bound to become a sovereign debt crisis—with all the implications that would have had for the integrity of the euro area. Only an astonishing case of selective distraction can explain why this development was lost in the public debate at the time, and then forgotten. The repatriation of both politics and policies that we saw in the last chapters was probably responsible.

    It should have been obvious that the problems of the banks were becoming a huge burden for some states. But banks were dealt with...

  9. 6 The American Crisis Becomes the European Crisis
    (pp. 100-109)

    The dispute between Germany and France on the management of the euro zone dated from the first concepts of deeper economic integration in Europe. In the January 1991 French draft of what was to become the Maastricht Treaty, a proposal for an economic government parallel to the ECB was clearly stated. Such a proposal could not survive the opposition of the Bundesbank, which saw the need for a full-fledged political union if the euro zone countries were to share fiscal responsibilities. However, French diplomats considered it a national victory that they managed six years later, in 1997, to achieve agreement...

  10. 7 The European Central Bank’s First Rescue of the States
    (pp. 110-122)

    In the spring of 2009, long before the debates of 2010 about getting the European Central Bank to help struggling governments finance their debts, the ECB actually provided them with indirect help—in a stealth violation of its mandate. The secret deal, call it the “Grand Bargain,” was closed behind the scenes and formally respected both the EU treaty and the Statute of the ECB. But the fact is that when, in May 2009, the ECB decided to step in decisively and help the ailing banks through a huge provision of liquidity, these banks were asked by the governments to...

  11. 8 Karlsruhe, Ruling the World from the Province
    (pp. 123-134)

    After nine months of unprecedented economic troubles and political divergences, Chancellor Merkel’s speech on May 27, 2009, at Berlin’s Humboldt University was anxiously expected around the world. For Europe, the month and location were highly symbolic. May 9 had been the fifty-ninth anniversary of the declaration by then French foreign minister Robert Schuman that a new form of organization of states in Europe would be formed and called a supranational community. This was the proposal that inaugurated the building of a united Europe. Moreover, Humboldt University was the place where nine years earlier on May 12, 2000, Joschka Fischer, then...

  12. 9 The Well-Known Secret of the Greek Tragedy
    (pp. 135-146)

    George Papandreou and his Socialist PASOK party had won parliamentary elections just two days earlier, when on October 6, 2009, Bank of Greece governor George Provopoulos reported privately to him that the country’s budget deficit was escalating above a shocking 10 percent of GDP. Officially, Greece was still expected to run in 2009 a deficit of only 3.7 percent. In the same hours, the European Commission in Brussels—unaware of the revision in Athens—was presenting its annual report on the euro area, which included the old and much more comforting figure for the Greek deficit. What central banker Provopoulos...

  13. 10 Let Greece Default?
    (pp. 147-159)

    On January 12, 2010, the European Commission confirmed that Athens had falsified its statistics and that “severe irregularities” had been detected in Greece’s accounting of its public deficit. Chancellor Merkel declared instantly that Greece’s mounting deficit risked hurting the euro, which was going to face a “very difficult phase” in the coming years. The comment, posted on the German government website, was soon removed. Heated sentiments were breeding on the heels of the Greek shock. Sometimes they translated into public statements made by the highest political representatives of single countries, thus immediately causing extreme reactions in the markets.¹ Three days...

  14. 11 Bringing the Euro to the Brink, in Order to Save It
    (pp. 160-173)

    In the late winter of 2010, Europe’s rhetoric inclined toward Oswald Spengler’s tragic vision of Western decline, plagued by the power of money, the disintegration of communities, and the domination of plutocrats and demagogues. It was an irrational vision but was deeply entrenched in European culture and rooted in the nervous system of societies. While politics struggled to cope with the financial crisis, the “power of money” had emerged out of the metaphor between February and March. With a typical mix of leveraged bets, frantic information, and herd behavior, financial markets interacted with the emotions of public opinion across the...

  15. 12 Sell Your Islands
    (pp. 174-183)

    Hoping to break the gridlock between Greece and Germany, Prime Minister George Papandreou visited Angela Merkel in Berlin on March 5, 2010. Even before he arrived, however, the chancellor announced what would not be discussed: “I expressly want to say [that the meeting] isn’t about aid commitments, but about good relations between Germany and Greece.” For Papandreou, that was like the crack of the whip. “We have fulfilled to the utmost all that we must from our side; now it’s Europe’s turn,” Papandreou told his fellow ministers just before taking off for Berlin. The Greek government had just announced a...

  16. 13 Contagion
    (pp. 184-194)

    At the beginning of April 2010, the Greek situation seemed to be getting worse by the day, and the markets questioned whether the European partners were committed firmly to giving Athens a chance to avoid default. The interest rate premium Athens was asked to pay over benchmark German bonds rose by more than 4 percentage points, its highest level since Greece joined the euro in 2001. The interest rate was above the threshold of 7 percent, considered an alarm bell for unsustainable borrowing costs. By the end of May, the Greek government faced a total financing requirement of around €29...

  17. 14 Dr. Faust Saves the Euro
    (pp. 195-218)

    The fears and the fury of the markets could not be contained by the painstaking and long negotiations over the Greek loan. European leaders needed urgently to grapple with a host of broader issues, first of all, setting up a sizable financial fund, especially for a number of countries looking less and less stable. The Greek agreement had simply come too late. Contagion was vigorously proceeding and the euro area was never so close to collapsing as at the beginning of May 2010. To counter the disruption in the markets, two more high-level meetings were scheduled, the first at the...

  18. 15 From a New Complacency to the Irish Crisis
    (pp. 219-232)

    “Ladies and gentlemen, let’s not talk around it: The crisis over the future of the euro is not just any crisis. It is the greatest test that Europe has gone through since 1990, if not even in the fifty-three years since the adoption of the Rome Treaty. This test is an existential one. It must be passed. Failing it, the consequences would be incalculable for Europe and beyond. But succeeding, then Europe will be stronger than before,” Angela Merkel declared.

    Only three days after the last of the series of fast-paced EU meetings in early May 2010, and when markets...

  19. 16 A Sophisticated Way to Commit Suicide
    (pp. 233-249)

    October 18, 2010, was the much-awaited deadline for accomplishing the resetting of the economic governance of the EU. It turned out to be a fateful day, one of the worst for the whole crisis. That something was going wrong became evident during the morning. When EU finance ministers arrived in Luxemburg for a meeting of the Economic and Financial Affairs Council (ECOFIN) on that Monday, Germany’s Wolfgang Schäuble and France’s Christine Lagarde were not among them.

    Ireland was on the brink, but was still resisting the pressures from Brussels, from the European heads of governments, and from European Central Bank...

  20. 17 A Fateful Fight between the ECB and the Heads of Governments
    (pp. 250-268)

    European Central Bank president Jean-Claude Trichet was very alarmed when he understood that the heads of governments intended to delay the launching of the weaponry necessary to defend the euro— particularly the “stabilization” funds that were to relieve the Central Bank from the burden of purchasing sovereign bonds. For months, he had been asking for a “quantum leap” in economic governance and had warned that defaults would be made more likely as a result of suggestions that private bondholders might be forced to accept losses. Indeed, the markets had received that idea very badly, increasing Trichet’s concerns that the crisis...

  21. 18 The Crisis Reaches Italy and Spain
    (pp. 269-296)

    The decision by the European Central Bank to stop buying the bonds of Greece, Portugal, and Ireland was a major episode of the tug-of-war between the ECB and the national governments. Both sides underestimated the unintended consequences that their conflict— centered on the institutional setting of the stability funds and on future economic governance— would have on the private economy. It was a fatal mistake.

    Carried away by the dominant rhetoric that described the crisis as the consequence only of fiscal profligacy, European governments seemed unable to understand that the mechanism for transmitting contagion of the sovereign debt crisis was...

  22. 19 Berlusconi’s Moral Hazard and the German Waterboarding Strategy
    (pp. 297-321)

    Maybe for the first time in his life as a politician, Silvio Berlusconi had lost his touch with the public. Scandals had marred his charisma and poor results had tarnished his image as a successful entrepreneur on loan to the world of politics. Fearful of being judged, condemned, and finally jailed at age 75 for personal improprieties, he was determined to hold onto his power as long as possible. Since the beginning of the financial crisis, national governments in Europe had suffered a string of losses at every election. In France and Germany, the opposition had taken the lead in...

  23. 20 Solution or Dissolution: Political Union or the End of the Euro
    (pp. 322-347)

    At the beginning of October 2011 a vicious circle seemed to be leading the euro area toward breaking up. The banks’ fears had grown since the application of PSI (the so-called haircut of 21 cents for each euro the banks owned in Greek sovereign bonds). In September the EU-ECB-IMF troika alerted the euro zone authorities that, due to the worsening economic conditions and increasing Greek public debt, the “haircut” had to be much higher, around 50 to 60 percent of the debt in the hands of private investors.¹

    Once more, investors saw the Greek model as suggesting what could happen...

  24. Epilogue: Toward the Political Union
    (pp. 348-354)

    Telling an endless story can be useful only if the end eventually depends on the story itself. Since its beginning, the narrative of the crisis has been mainly made up of fears and recriminations. Accordingly, all the countermeasures have aimed primarily to build a system so that each country would stand on its own. But at the beginning of 2012, the crisis is far from over and we are finally understanding that it requires common financial capacities and stronger political integration. This is the kind of integration that finds no narrative when national governments dominate the scene. Imagine if the...

  25. Notes
    (pp. 355-394)
  26. Index
    (pp. 395-405)
  27. Back Matter
    (pp. 406-407)