By creating a single currency without the institutions to sustain it, the E.U. wound up with low growth, high unemployment, and popular disaffection.

It seems unlikely that anyone will ever write a rap musical about the foundation of the European Union, but until “Hamilton” it seemed unlikely that anyone would write one about the fiscal infrastructure of the nascent United States. If anyone does try to bust some rhymes about the creation of the E.U., he could find a protagonist in Jean Monnet, a Frenchman who had one of those extraordinary twentieth-century lives, not as an artist or a warrior or a leader or a mystic but as that less celebrated but equally distinctive human type the fixer. Monnet, who was born in 1888, spent his whole life in behind-the-scenes advocacy and deal-making, mainly in the sphere of international coöperation. Just after the First World War, he was appointed deputy secretary-general of the League of Nations, at the age of thirty-one. In 1923, he became an international banker; in 1933, he moved to Shanghai, at the invitation of the Chinese finance ministry, and helped fund the expansion of China’s railroads; in 1939, he moved to London to work on melding the French and English war industries; in 1940, he moved to the United States, on behalf of the British government, and added President Roosevelt to a list of friends and acquaintances that already included Winston Churchill, Charles de Gaulle, Walter Lippmann, John Foster Dulles, and Chiang Kai-shek. In Washington, Monnet worked on the Victory Program, a joint development of arms production, to such effect that, in the opinion of John Maynard Keynes, he “shortened the war by a whole year.”

All this was a preamble to Monnet’s greatest achievement. In retrospect, it is easy to see Europe’s recovery from the Second World War as inevitable. It didn’t seem so at the time, when Europe was broken, poor, riven by social divisions, and mired in severe problems left over from the war and the simultaneous onset of the Cold War. Europe as a whole needed the German economy to recover, but everyone, especially the French, feared a recrudescence of German power. This was not an abstract issue: Germany required coal and steel, and France didn’t want it to have them. The resource heartlands in question were, as Monnet put it, “distributed unevenly but in complementary fashion over a triangular area artificially divided by historical frontiers.” Wars had been fought over these resources for centuries.

Monnet’s idea was simple: the countries should share. If France and Germany pooled the production of coal and steel, two things would happen: the level of production would go up, because economies of scale would bring efficiency; and, more important, it would be impossible for the two countries to go to war. Neither country could get a jump on the other if their essential industries were inseparably interlinked. The resulting institution, the European Coal and Steel Community, was the first of the entities that coalesced into what is today the European Union. That would not have surprised Monnet: his draft coal-and-steel treaty was summed up in the prophecy, or the wish, that “this proposal will lay the first concrete foundations of the European Federation which is indispensable for the maintenance of peace.” In his memoirs, he wrote, “The last word was the most important.” The treaty would insure that Europe, a charnel house for the first half of the twentieth century, would in the second half become a place of guaranteed peace.

Origin stories tend to be complicated, and the European Union’s is no exception. Monnet was a pragmatist, as fixers must be, but he also had a visionary streak. He thought that Europe’s destiny was for its nations to grow closer together—that was his visionary side—but he didn’t think they would do so in a simple, linear manner. “I have always believed that Europe would be built through crises, and that it would be the sum of their solutions,” he said. “But the solutions had to be proposed and applied.” The inevitable crises would be opportunities to make countries grow closer together, to give up gradually larger pieces of their sovereignty and move toward a federal Europe.

This was a clever strategy, and very much the plan of a realist, but it left two huge questions unanswered. The first was: Why? Anyone could see the necessity of avoiding another European war, but it’s not obvious why that automatically involves a federal Europe. Even the most incurious tourist who visits, say, Bulgaria and Finland will have noticed that the countries don’t just have different languages, they have different alphabets. Stay a little longer, and you might notice that they also have different cultures, religions, climates, histories, educational and legal and political systems, economies, food cultures, and national temperaments. Why is it a law of history that they must grow closer together? To insiders such as Monnet, this seems to have been a question that never needed answering, or even asking. It was a European version of Manifest Destiny.

The second question was linked to the first: Who wanted a united Europe? Who were the people who saw this process as both inevitable and something to be schemed and strived for? The answer was the pan-European political élite of people like Jean Monnet and his peers. There has never been a popular appetite for the idea of Europe: it was always an élite project. Monnet hadn’t ever stood for political office. “Ever closer union,” the phrase in the foundational document of the E.U., the 1957 Treaty of Rome, is just stated as a goal, without any explanation either of what it means or of why it would be a good thing for most Europeans. It was an end in itself.

For about four decades, the flaws implicit in the project didn’t seem important. Europe grew through institutions and agreements that, in the medium term, were immediately and practically beneficial to ordinary citizens. The result was a boom in trade, years of fairly consistent economic growth across the continent, and an unbeautiful but functional patchwork of arrangements in which some countries belonged in the European Free Trade Association but not in the E.U. (Switzerland, Norway, Iceland, Liechtenstein), some countries were in the E.U. but not in the Schengen zone of passport-free borders (the U.K., Ireland), some countries were in the Schengen zone but not in the E.U. (Switzerland, Norway, Iceland), and one country wasn’t in the E.U. (Greenland) but was part of a state that is (Denmark). There was a pan-European but non-E.U. court, the European Court of Human Rights, whose rulings often caused mortification among rebuked governments. This might not have looked like anyone’s model of a union, but peace and prosperity have a lot to be said for them, especially for a continent that had done such a thorough job of testing the alternatives.

In 1992, the European Union made what the Nobel Prize-winning economist Joseph Stiglitz calls “a fatal decision”: the choice “to adopt a single currency, without providing for the institutions that would make it work.” In “The Euro: How a Common Currency Threatens the Future of Europe” (Norton), Stiglitz lucidly and forcefully argues that this was an economic experiment of unprecedented magnitude: “No one had ever tried a monetary union on such a scale, among so many countries that were so disparate.” The idea was to force Europe closer together politically by forcing it closer together monetarily—in effect, to engineer one of Monnet’s crises, the ones that would build Europe. The nineteen countries in the eurozone (out of twenty-eight in the E.U.) would adopt a single currency but would not have a parallel system to raise tax. There would be monetary union without fiscal union. A European Central Bank (E.C.B.) would run the currency and set interest rates, but there would be no pan-European finance ministry to run the economy. If you pitched this idea to a class in Economics 101, there would be an embarrassed pause, and eventually a hand would go up and someone would ask, “Is that even possible?” The answer: “Nobody knows.” The E.U. went ahead with its experiment anyway. To raise the stakes even further, there was no exit mechanism for the single currency: monetary union was, by design, irreversible.

The euro was adopted as a currency peg by the relevant countries in 1999, and came into use as an actual physical currency on New Year’s Day, 2002. Ta-da! Europe now had a common currency for the first time since the end of the Roman Empire. (Some of the local celebrations were muted. I happened to be in Paris that day, and much of the chat was about the various bodies that had taken the chance of sneaking in a price rise as francs were swapped for euros.) For the first few years, the eurozone went well, with decent growth and inflation almost exactly at the E.C.B.’s target rate of two per cent. The positive numbers, though, concealed growing structural tensions. Because Germany is Europe’s dominant economic power, the interest rate set by the E.C.B. tended to be the one that makes the most sense in a German context. In these years, that was a low interest rate, which helped keep money cheap and the value of the euro low. This helped Germany’s heavily export-oriented economy.

The interest rate that made sense in the Ruhr Valley, however, made much less sense in countries that were starting to see bubbles. In Ireland and Spain and other countries on Europe’s so-called periphery, people were borrowing money like crazy to get on the runaway train of real-estate prices. These countries’ economies looked great on paper—Spain and Ireland were running budget surpluses and had low levels of accumulated government debt. There were growing risks, though. If those countries had control of their own interest rates, the rates could have been raised to slow down the boom, but the countries had, in that crucial respect, given away economic sovereignty. (Governments that do have this control, let the record show, often don’t use it when bubbles are inflating. The economic feel-good factor wins a lot of elections, and central banks pay more attention to their political masters than they pretend.)


When Lehman Brothers collapsed, in September, 2008, and the global financial crisis hit, it was, to borrow a phrase of Hunter S. Thompson’s, “a case of the chickens coming home to roost, accompanied by three giant condors.” All Western economies went into recession, but the eurozone countries suffered the most and for the longest. Americans may have got out of the habit of talking about their economy as a success story, but from a European perspective it unmistakably is one. As Stiglitz points out, the U.S. unemployment rate hit ten per cent for a single month in 2009 and is now below five per cent; the eurozone unemployment rate hit ten per cent around the same time, and is still in double digits. In some European countries, youth unemployment is more than forty per cent. America’s economy is bigger than it was when the crisis hit. The eurozone’s is smaller. To take just one example, Italy, the third-largest economy in the eurozone, has a per-capita G.D.P. that’s lower than it was at the end of the last century. For Stiglitz and for many of his colleagues, the euro is to blame for all this underperformance.

In Europe, the first thing that happened after the crisis was that all the bubbles popped. The “peripheral” countries suffered dramatic economic contractions, compounded by bank implosions, and had to appeal for financial assistance to avert complete collapse. At this point, as Stiglitz explains, the story took an even darker turn. A complex mixture of international politics, economics, and law meant that the body that stepped in to help the crisis economies was a triple-headed entity, the Troika, made up of the European Commission, the European Central Bank, and the International Monetary Fund.

The Troika had strong views about how the afflicted economies should be fixed. They rolled into town demanding austerity, meaning severe cuts to government spending, and structural reform, meaning changes to the way a country’s economy works. They doled out money on the condition that these policies were implemented, and accompanied the package with charts showing how the economy was going to recover after the austerity medicine took effect. It is, if you have a twisted sense of humor, just possible to see the funny side of these charts, especially the ones concerning Greece. They now show a cluster of lines going briefly down and then up, with another line a long way below, which goes sharply down, then down a bit more, then goes flat. The optimistic cluster represents the sequence of Troika predictions for the effect of austerity programs on the Greek economy, forecasting recession and recovery. The lower line represents what actually happened—the most severe decline of any developed economy since the Great Depression. Similar stories can be told of the other eurozone countries that received bailout-and-austerity packages. The numbers are grim, and the human realities are worse—joblessness, hopelessness, forced emigration, spikes in the suicide rate.

Stiglitz points out that these kinds of austerity policies—trying to cut your way out of a slump—have been tried many times since the days of Herbert Hoover, and have consistently failed. “One possibility—a real one—is that the architects of austerity truly believed in the economic doctrines that they espoused, in spite of the overwhelming evidence against them accumulated over more than three-quarters of a century,” he writes, in numb wonder. Well, yeah, it sure looks like it, and if we turn to “The Euro and the Battle of Ideas” (Princeton), by Markus K. Brunnermeier, Harold James, and Jean-Pierre Landau, we start to find an explanation. The three authors are, respectively, a German academic economist, an English economic historian, and a French banker turned economics professor, and their book is an attempt to explain the euro’s ideological and historic background. They explore the dichotomy between French and German political-economic philosophies. The first values flexibility and solidarity and state intervention; the second stresses rules and consequences and free markets.

They note that France and Germany have in effect swapped sides in this debate. In the nineteenth and early twentieth centuries, the French had a strong tradition of economic liberalism, and the newly unified Germany believed in state-centered, state-directed economic policies. These biases were reversed by the disasters of Nazism and the Second World War. France’s wartime failure discredited its élites and their laissez-faire inclinations, and led to a heavy new emphasis on state planning, whereas Germany became obsessed with the idea of a rules-based liberalism. The product, known as Ordoliberalism, involves a mixture of free-market economics with an attitude toward rules that approaches mystic reverence.

The Ordoliberal tradition explains why German economists, who read the same textbooks and study the same historic examples as the rest of the affluent world, can come to conclusions that are, as Stiglitz puts it, “not only rejected by large parts of the eurozone but also by the majority of economists.” Where others see a crisis caused by weak demand, Germany sees a crisis caused by excessive use of cheap credit, which can be cured only by severe cuts in spending. One way of describing the euro crisis is to say that, on the single most important issue facing Europe, the single most powerful European is wrong. Chancellor Angela Merkel, the European in question, talks fondly about the “Swabian housewife,” a figure of legendary common sense and frugality who, when times are hard, balances the books by cutting her spending. This analogy between households and governments makes mainstream economists splutter with irritation; as Stiglitz observes, when the Swabian housewife reduces her spending, her husband doesn’t lose his job.

The focus of the Ordoliberal morality tale has been Greece, which is a complicated and sad example because so many contradictory things are true. The Greek government spent far too much borrowed money; ordinary Greeks have suffered terribly from austerity; the imposition of austerity programs was brutally undemocratic; rich Greeks don’t pay their taxes; the main beneficiaries of the Greek bailouts were the banks that had recklessly lent money; for more than half of the time since the creation of an independent Greece, in 1832, the Greek state has been in default on its debts.

It’s difficult to attribute all this to the euro, so for a clearer view of the problems caused by the single currency we might do better to look toward Europe’s Far North. Finland may be the clearest example of a country weakened by embrace of the euro. The single currency didn’t cause its problems, which initially were to do with the economic slowdown of its neighbor Russia; the shrinking value of one of its principal industries, forestry; and the iPhone. (Seriously: Finland’s biggest company is Nokia, whose leadership bet the company on the idea that smartphones would turn out to be a fad.) But for the Finns, as for everyone else, the single currency took away the two main monetary tools a country can use to manage its economy. The first is to cut interest rates in order to stimulate demand. (The E.C.B. eventually did that—indeed, it now pays negative interest rates, a historically unprecedented act. At the start of the crisis, though, it was very slow to act, and twice raised interest rates at catastrophic moments.) The second is to reduce the value of the currency in order to stimulate exports. Thanks to the euro, the E.C.B. controls both of those things, and also sets targets to prevent any other kind of stimulus through deficit spending. Finland has a technologically literate, hardworking, and well-educated workforce, with little corruption, low levels of government debt, and no home-grown oligarchy—in other words, none of the factors that are sometimes seen as the source of problems for the troubled Southern European economies. Even so, the Finnish economy contracted by eight per cent, more than it did during the Great Depression. You can’t make an Ordoliberal morality tale out of Finland; you can make a convincing story about the failure of the euro.

In the immediate aftermath of the financial crisis, bankers and other insiders kept telling me that European governments must “buy time,” to hold off another crisis for long enough so that economies would grow, debts would shrink, valuations would recover, and the banking system would go back to normal. That hasn’t happened. The single currency has created a situation of low or no growth and high unemployment, spurring popular anger and disaffection. It’s also pretty clear what it would take to fix the euro: an increased sharing of economic burdens between creditor and debtor countries. Put simply, the richer North must take on some of the costs of the poorer South. That’s what happens in a real currency union—it’s the point at issue in Thomas Jefferson’s Cabinet battle with Alexander Hamilton (“If New York’s in debt, why should Virginia bear it? / Our debts are paid, I’m afraid. / Don’t tax the South cuz we got it made in the shade.” It might be difficult to imagine Angela Merkel rapping that, but it’s easy to imagine her agreeing with Jefferson’s sentiment.)

Stiglitz gives a detailed and persuasive list of measures that would help to save the euro, including a continent-wide system of deposit guarantees, a unification of the banking system, a sharing of debt burdens, and an increased role for fiscal policies to help growth and stimulate employment. It is a common-sense wish list, but it has one grievous flaw, which is that it is almost certain not to happen. Germany is just too set against these ideas. It is a matter of deep conviction there that the euro must never be a “transfer union.” The eurozone must never be about the rich paying for the poor, the North for the South. There are good historical reasons for this passionate adherence to fiscal rectitude, rooted in the causal link between deficits, runaway inflation, and the rise of the Nazis. As “The Euro and the Battle of Ideas” makes clear, this theme in German thought runs very deep. A German government can’t follow the necessary policies without facing electoral disaster.

So now what? The United Kingdom’s shock vote to leave the European Union was a warning about the gap between angry voters and pro-immigration, pro-globalization élites. As Jean-Claude Juncker, the president of the European Union, has memorably said, “We all know what to do, but we don’t know how to get reëlected after we’ve done it.” That doesn’t sound like a prediction of radical reform. It’s a dangerous moment for Europe. Stiglitz observes that if the countries that committed to the single currency in 1992 had known what they know now, and if people had had the chance to vote on the proposal, “it is hard to see how they could have supported it.” That’s a hell of an indictment. The lack of pragmatism, the willingness to go on doing something that visibly doesn’t work, would have appalled that old fixer Jean Monnet. He would never have allowed the euro to become an end in itself, to be defended ahead of the prosperity and well-being of Europe’s citizens. His father, a Cognac merchant from the eponymous French town, liked to say, “Every new idea is a bad idea.” In his memoirs, Monnet says that this observation is true only for brandy, but it looks as if it also applied to experimental continent-wide monetary unions. ♦