“Marsh exposes the basic problem of the euro: no one’s in charge Monetary union was a colossally risky experiment launched without adequate crisis management precautions and without centralised political oversight Unlike the other countries, Britain properly analysed the risks and decided, rightly, to stay out It’s a pity that other Europeans didn’t show similar caution.” —Lord (John) McFall, member of House of Lords Economic Affairs committee, former chairman, House of Commons Treasury Committee “An admirably lucid analysis Marsh weaves together the politics as well as the economics of the euro In Europe (very properly) politics is about democracy If the euro area is to become more integrated, as it must in order to survive, then the democratic deficit, which is already bad enough, would become intolerable This is a hugely important issue.” —Lord (Nigel) Lawson, former Chancellor of the Exchequer “David Marsh has once again placed his finger on the gaping wounds that continue to afflict the European Monetary Union While not everyone will agree with his conclusions – and a great many more will hope that he is wrong – he has built a cogent case for being very worried about the future of the single currency.” —Prof Michael Burda, School of Business and Economics, Humboldt University of Berlin “Europe is brilliantly right because it has achieved zero prospect of war, an achievement no other region can match Yet it’s also brilliantly wrong because it has tried to achieve an impossible dream: monetary union without fiscal union Marsh explains well the European mess and even suggests a solution His book is a must read for European policy-makers Even Asians may learn a lesson or two.” —Prof Kishore Mahbubani, Dean, Lee Kuan Yew School of Public Policy, National University of Singapore “A brilliant and incisive analysis of the intractable practical and political problems facing the euro and why the hopes of its founders have been disappointed.” —Lord (Christopher) Tugendhat, chairman, House of Lords EU External Affairs committee, former European Commissioner “The fate of the euro area is the most momentous public issue of our times and there is no better guide than this gripping, well-informed study by the leading expert on its genesis and development.” —Prof William Paterson, Honorary Professor of German and European Politics, Aston Centre for Europe, University of Aston “This book deserves wide discussion among harried and frustrated policy-makers I am happy that Marsh has taken up the challenge of discussing a plan to make the euro survive for the longer term Even though he exaggerates some of the difficulties, this book will have an important impact.” —Prof Niels Thygesen, Emeritus Professor of Economics, University of Copenhagen, member of the Delors Committee on Monetary Union “This precise, elegant, and humorous depiction of Germany’s unique role in the euro drama brings the reader to the central argument: without political union, monetary union is left weak or even unviable A single central bank needs a single political counterparty Marsh argues that the euro crisis will linger to the point of becoming chronic but rejects the notion of a rapid, dramatic disintegration It is difficult to imagine a pathway back to national currencies that would not entail even greater catastrophe.” —Prof Maria Antonieta Del Tedesco Lins, Professor of International Relations, University of São Paulo “A lucid and well-informed, if somewhat German-centric, account of the development of the euro crisis, in which Marsh explains, with admirable clarity, why the crisis has been so difficult to resolve Although he charts a way out, he makes clear his scepticism that Europe’s leaders can deliver on their many promises to reform Even if he is only half right, pro-Europeans should heed his analysis and warnings, and ask themselves whether the governance changes adopted to date go far enough.” —Prof Iain Begg, European Institute, London School of Economics and Political Science “This book is right to question how the EU can sort out the economic and social mess created by the euro It is a case of having a bank account with the neighbours before they have worked out who pays all the bills David Marsh tries to pilot a way through these troubles.” —John Redwood MP, Chairman, Conservative Party Economic Policy Committee “An excellent analysis of the crisis in the euro area The comprehensive diagnosis of the causes of the crisis is accompanied by a sobering prognosis regarding the prospects for its resolution anytime soon.” —Prof Simon Bulmer, Professor of European Politics, University of Sheffield EUROPE’S DEADLOCK DAVID MARSH is Europe’s foremost chronicler of post-war monetary affairs Chairman and cofounder of the Official Monetary and Financial Institutions Forum (OMFIF), he wrote for the Financial Times between 1978 and 1995, including in France and Germany, becoming European editor, and subsequently worked in City financial institutions He is the author of four acclaimed books on European politics and money, including The Euro: The Battle for the New Global Currency (2009 and 2011) Copyright © 2013 David Marsh The right of David Marsh to be identified as author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988 All rights reserved This book may not be reproduced in whole or in part, in any form (beyond that copying permitted by Sections 107 and 108 of the U.S Copyright Law and except by reviewers for the public press) without written permission from the publishers For information about this and other Yale University Press publications, please contact: U.S Office: sales.press@yale.edu yalebooks.com Europe Office: sales@yaleup.co.uk www.yalebooks.co.uk Set in Arno Pro by Yale University Press Printed in Great Britain by Hobbs the Printers Ltd, Totton, Hampshire Library of Congress Control Number: 2013942358 ISBN 978-0-300-20120-8 A catalogue record for this book is available from the British Library 10 2017 2016 2015 2014 2013 Contents Preface Introduction Unhappy family Dashed illusions The German question revisited Winners and losers A dangerous vacuum Irreparable errors The technocrats stumble A bank unlike the others The Cyprus cauldron 10 Sovereignty – the tipping point 11 Fear holds the key 12 Germany’s limits 13 The French connection 14 The Bundesbank strikes back 15 In Italy, more showdowns 16 The chimera of banking union 17 The IMF’s European conundrum 18 Anglo-Saxon ambivalence 19 Asia’s star rises 20 War and peace Notes Index Preface THE GESTATION phase for this book has been miraculously and mercifully short In March 2013 Christian Strasser of Germany’s Europa Verlag persuaded me to write a short book in German to elaborate on my thesis that the euro crisis could not be resolved I delivered a text in about six weeks, and then naturally had to write one in English (In some ways this was more precise, more difficult and more detailed, for example with my plan for a properly federal Europe, which I don’t think anyone wants to put into effect.) I would like to thank many colleagues and friends who (often unconsciously) have assisted my efforts to understand what is going on; I would like to single out Niels Thygesen, Meghnad Desai, Oscar Lewisohn and Michael Stürmer for help with the text Lauren Roberts, Edward Longhurst-Pierce and everyone else at OMFIF have as always been of great assistance in lots of ways, and my family has again shown forbearance Thanks to Robert Baldock and Phoebe Clapham at Yale University Press for pushing this through David Marsh Wimbledon, June 2013 European Commission powers over fiscal policies (i), (ii) support packages (i) tenth anniversary euro report (i) European Council (i) European exchange rate mechanism (ERM) (i) European finance ministry and treasury, plan for (i) European Monetary Fund (EMF) (i) European Monetary System (EMS) (i), (ii) European Parliament (i) European Stability Mechanism (ESM) (i), (ii), (iii), (iv), (v) European treaty (i), (ii) European Union (EU) bureaucracy (i) support measures (i) exchange rate crises in EMS (i) distortions in (i), (ii), (iii) effects of euro on (i), (ii), (iii), (iv) effects on IMF assistance (i) influence on trade (i) Italian central bank’s view on (i) outcome of Germany returning to D-Mark (i) problems from fixing (i), (ii), (iii) exports (i), (ii), (iii), (iv), (v), (vi), (vii), (viii), (ix) expropriation of savings (i), (ii) Fabius, Laurent (i) Fazio, Antonio (i) Federal Reserve (i), (ii), (iii) Feldstein, Martin (i) financial crisis in Asia (i) trans-Atlantic (i), (ii), (iii), (iv), (v), (vi), (vii), (viii), (ix) First World War (i) foreign trade Asia (i), (ii) balances (i), (ii) Britain (i), (ii) German trade (i), (ii), (iii), (iv) internal euro area (i), (ii), (iii) France diversification of trade (i) economic performance (i), (ii), (iii) inferiority complex (i) institutional renewal of euro bloc (i) leadership of euro bloc (i), (ii) relationship with Germany (i), (ii), (iii) traditional policies of (i) views on German monetary policy (i) Freud, Sigmund (i) German constitutional court (i), (ii), (iii) Germany anti-euro party (Alternative für Deutschland) (i), (ii) anti-German sentiment (i), (ii) benefits from euro (i), (ii) claims on foreign countries (i) convergence of interest rates with Greece (i) creation of euro (i) diversification of trade (i), (ii) economic performance (i), (ii), (iii), (iv), (v) exposure to perceived euro blackmail (i) fears over revaluation (i) household wealth (i) leadership of euro bloc (i), (ii) measures to alleviate crisis (i), (ii), (iii) neighbours’ hesitancy towards (i) opposition to bond purchases (i) parliamentary elections (i) payments surplus (i), (ii) relationship with France (i), (ii), (iii) reunification (i), (ii), (iii), (iv) savings deposits (i) Stability and Growth Pact (i) tax cuts (i) views on inflation (i) Giscard d’Estaing, Valéry (i) Gold Standard (i) Goldman Sachs (i) Gonzalez, Felipé (i) governance (i), (ii), (iii), (iv), (v), (vi), (vii) International Monetary Fund (IMF) (i) Greece austerity (i) bond markets (i) convergence of interest rates with Germany (i) current account deficits (i), (ii) economic performance (i), (ii), (iii) effective revaluation (i) entry into euro (i) national independence and economic policy (i) Grillo, Beppe (i) Heine, Heinrich (i) Hollande, Franỗois (i), (ii) Huis clos (Sartre) (i) Independent Budget and Debt Authority, plan for (i) India (i), (ii), (iii) Indonesia (i), (ii) inflation (i), (ii), (iii), (iv), (v), (vi) International Monetary Fund (IMF) (i) Asian safety nets (i) dissatisfaction over commitment to Europe (i) growth measures (i) initial European resistance to involvement (i) past surveillance work (i) relationship with Brazil, China, India and Russia (i) report on Greece (i) support measures in Europe (i), (ii), (iii), (iv), (v), (vi) tensions over troika (i) Ireland account deficits (i), (ii) austerity (i) budget surpluses before crisis (i), (ii) economic performance (i), (ii), (iii) effective revaluation (i) national independence and economic policy (i) rescue measures (i), (ii) role of banks (i), (ii) Issing, Otmar (i), (ii) Italy (i), (ii) bond market (i), (ii) current account deficits (i) diversification of trade (i) economic performance (i), (ii), (iii), (iv) financing needs (i) household wealth in (i) inclusion in euro (i) links with Spain and France (i) motivations to join euro (i) parliamentary elections (i) savings deposits (i) showdowns ahead (i) Japan central bank operations (i), (ii) commonality of policy with US and China on euro rescues (i) payments imbalances (i) reserve holdings (i) view on euro crisis (i) Keitel, Hans–Peter (i) Kiesinger, Kurt Georg (i) Kohl, Helmut description of ‘war and peace’ (i) German strategic interests (i) mistakes over reunification (i) relationship with Bundesbank (i) relationship with Mitterrand (i) role in euro creation (i) shortcomings on reforms (i) Lagarde, Christine (i) Lancaster House (i) Laiki Bank (i) Lautenschläger, Sabine (i) Lebanon (i) Letta, Enrico (i) Luxembourg (i) Maastricht Treaty clause on banking supervision (i) German view on (i), (ii) no-bailout clause in treaty (i), (ii), (iii) politicians’ perceived failure to understand treaty (i) referendum in France (i) sacrifice of D-Mark (i) summit (i), (ii) Macbeth (Shakespeare) (i) Major, John (i), (ii) Malaysia (i) Malta (i) Marshall Plan (i) Medvedev, Dmitry (i) Merkel, Angela (i) ability to remain in power (i), (ii) domestic popularity (i) Law of Permanent Disappointment (i) policies on euro (i), (ii), (iii), (iv) relationship with Berlusconi (i) relationship with France (i), (ii) relationship with Weidmann (i), (ii) reminder to foreigners over German strength (i) Mexico (i) Mitterrand, Franỗois admission of euro miscalculation (i) death (i) links with Hollande (i) relationship with Kohl (i) role in euro creation (i) views on European Central Bank (i) views on Germany (i), (ii), (iii) monetary union (i), (ii), (iii) Asia view on (i) banking union (i) Bundesbank position (i) conditions for (i) creation of (i), (ii), (iii) debate on member states’ sovereignty (i) divisions within (i), (ii) effects of (i), (ii), (iii), (iv) effects of ECB limitations (i) fears of break-up (i) Franco-German differences (i) imbalances in (i), (ii), (iii) IMF role (i) implications of Cyprus rescue (i) Italy effects (i) measures for euro support (i), (ii) motivations for (i) optimism on (i) plan for long-term support (i) Trichet doctrine on (i) Monti, Mario (i), (ii) moral hazard (i), (ii), (iii) Napoleon III (i) Netherlands current account surplus (i) diversification of trade (i) economic performance (i), (ii) status in euro (i), (ii) Nineteen Eighty-Four (Orwell) (i) Nixon, Richard (i) Nölling, Wilhelm (i) Obama, Barack (i) Ottoman Empire (i) Outright Monetary Transactions (i) People’s Daily (i) peripheral countries (i), (ii), (iii), (iv), (v), (vi), (vii) Pöhl, Karl Otto (i), (ii), (iii), (iv) Poland (i) political stability (i) political union (i), (ii), (iii), (iv) effects of lack of (i) requirement for (i), (ii), (iii), (iv) Portugal austerity (i) bond market (i) current account deficits (i) Delors comments on trade deficits (i) economic performance (i), (ii), (iii), (iv) effective revaluation (i) IMF salvage mission (i) national independence and economic policy (i) rescue packages (i) savings deposits (i) pound, British (i) Praet, Peter (i) Prussia (i) public finances (i), (ii), (iii) quantitative easing (i) regulation (i), (ii) renminbi (i), (ii), (iii) rescue packages (i), (ii), (iii), (iv) Cyprus (i), (ii) procedures (i), (ii) see also European Stability Mechanism; International Monetary Fund Russia (i), (ii), (iii), (iv) payments imbalances in (i) Rutte, Mark (i) Saccomanni, Fabrizio (i) Sarkozy, Nicolas (i), (ii) Saudi Arabia, payments imbalances in (i) Schäuble, Wolfgang (i), (ii) Schmidt, Helmut (i), (ii), (iii) Schröder, Gerhard reforms (i), (ii), (iii) relationship with Chirac (i) views on France (i) Schumpeter, Joseph (i) Second World War (i), (ii), (iii), (iv), (v), (vi), (vii) Singapore (i), (ii) Soros, George (i) South Korea (i), (ii) Spain (i), (ii), (iii), (iv) austerity (i) bond markets (i), (ii) budget surpluses before crisis (i) current account deficits (i), (ii) diversification of trade (i) economic performance (i), (ii), (iii), (iv) effective revaluation (i) household wealth in (i) national independence and economic policy (i) realisation of euro drawbacks (i) rescue measures (i), (ii) savings deposits (i) strains on public finance (i) Stability and Growth Pact (i), (ii) Stark, Jürgen (i) Steinbrück, Peer (i) stimulus (i), (ii) Stoltenberg, Gerhard (i) Strauss-Kahn, Dominique (i) Stürmer, Michael (i) Sweden (i) Szász, André (i) tax revenues (i), (ii) Thailand (i) Thatcher, Margaret (i), (ii) Tietmeyer, Hans (i), (ii) Trichet, Jean-Claude accusation against euro critics (i) background (i) demand for austerity in Italy (i) eulogising over monetary union (i) moment of hubris (i) replacement by Draghi (i) self-description as ‘Mr Euro’ (i), (ii) supporting the Maastricht referendum (i) troika (i), (ii) Truth and Reconciliation Commission (i), (ii) unemployment (i), (ii), (iii), (iv), (v) United Kingdom (i), (ii), (iii) anti-European UK Independence Party (UKIP) (i) benefits from euro crisis (i) coalition dissent (i) competitiveness (i) Conservative party, Europe wrangling (i) Labour party (i) leading trade partner of euro bloc (i) Liberal Democratic party (i) monetary mistakes by (i) opt-out from euro (i) post-Second World War status (i) referendum on EU membership (i) referendum on Scotland’s membership of UK (i) Royal Air Force (i) traditional policies of (i) view on future UK euro membership (i) United States (i), (ii) adhesion to ‘exorbitant privilege’ (i), (ii) commonality of policy with China and Japan on euro rescues (i) crisis management (i) economic policies (i) monetary mistakes by (i) payments imbalances in (i) trade position with euro bloc (i) Van Rompuy, Herman (i) Weber, Axel (i) Weidmann, Jens (i), (ii) Weimar republic (i) Welteke, Ernst (i) World Bank (i) yen (i), (ii) Yugoslavia (former) (i) ... system being inseparable from the society behind it. 2 Both before and after the Maastricht summit, the Bundesbank and other central banks in Europe, such as the Bank of England, subjected the single... German-British sociologist Ralf Dahrendorf, who said that the euro would split rather than unite Europe, have become a reality The gap between creditors and debtors has become unbridgeable The former... citizens The unpalatable truth, admitted behind the scenes even by experts at the centre of the system, is that Europe’s united money has not alleviated the European crisis: it has in fact been