Unhappy Union

UNHAPPY UNION Unhappy Union.indd 1 21/03/2014 15:33 OTHER ECONOMIST BOOKS Guide to Analysing Companies Guide to Business Modelling Guide to Business Planning Guide to Cash Management Guide to Commodities Guide to Decision Making Guide to Economic Indicators Guide to Emerging Markets Guide to the European Union Guide to Financial Management Guide to Financial Markets Guide to Hedge Funds Guide to Investment Strategy Guide to Management Ideas and Gurus Guide to Managing Growth Guide to Organisation Design Guide to Project Management Guide to Supply Chain Management Numbers Guide Style Guide Book of Business Quotations Book of Isms Book of Obituaries Brands and Branding Business Consulting Business Strategy Buying Professional Services Doing Business in China Economics Managing Talent Managing Uncertainty Marketing Marketing for Growth Megachange – the world in 2050 Modern Warfare, Intelligence and Deterrence Organisation Culture Successful Strategy Execution The World of Business Directors: an A–Z Guide Economics: an A–Z Guide Investment: an A–Z Guide Negotiation: an A–Z Guide Pocket World in Figures Unhappy Union.indd 2 21/03/2014 15:33 UNHAPPY UNION How the euro crisis – and Europe – can be fixed John Peet and Anton La Guardia Unhappy Union.indd 3 21/03/2014 15:33 THE ECONOMIST IN ASSOCIATION WITH PROFILE BOOKS LTD Published by Profile Books Ltd 3a Exmouth House Pine Street London ec1r 0jh www.profilebooks.com Copyright © The Economist Newspaper Ltd, 2014 Text copyright © John Peet and Anton La Guardia, 2014 All rights reserved. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of both the copyright owner and the publisher of this book. The greatest care has been taken in compiling this book. However, no responsibility can be accepted by the publishers or compilers for the accuracy of the information presented. Where opinion is expressed it is that of the author and does not necessarily coincide with the editorial views of The Economist Newspaper. While every effort has been made to contact copyright-holders of material produced or cited in this book, in the case of those it has not been possible to contact successfully, the author and publishers will be glad to make amendments in further editions. Typeset in EcoType by MacGuru Ltd [email protected] Printed in Great Britain by Clays, Bungay, Suffolk A CIP catalogue record for this book is available from the British Library Hardback isbn: 978 1 78125 291 8 Paperback isbn: 978 1 78125 292 5 e-book isbn: 978 1 78283 083 2 The paper this book is printed on is certified by the © 1996 Forest Stewardship Council A.C. (FSC). It is ancient-forest friendly. The printer holds FSC chain of custody SGS-COC-2061 Unhappy Union.indd 4 21/03/2014 15:33 Contents List of figures vii Acknowledgements viii Preface xi 1 “If the euro fails, Europe fails” 1 2 From the origins to Maastricht 7 3 How it all works 19 4 Build-up to a crisis 29 5 Trichet’s test 39 6 Super Mario 68 7 The changing balance of power 96 8 In, out, shake it all about 110 9 Democracy and its discontents 121 10 How the euro spoilt any other business 135 11 Europe’s place in the world 142 12 After the storm 151 Notes 181 Appendices 1 Timeline 191 2 Treaties, regulations and pacts 193 3 Further reading 197 4 How The Economist saw it at the time 199 Index 205 Unhappy Union.indd 5 21/03/2014 15:33 List of figures 4.1 GDP, 1999–2014 32 4.2 Ten-year bond yields, 1995–2010 37 5.1 Ten-year bond yields, 2010–2012 61 6.1 Spain: five-year CDS premiums on sovereign and bank debt, 2007–12 72 6.2 Ten-year bond yields, July 2011–December 2013 89 6.3 Interest on loans to non-financial corporations up to €1m, 2007–14 93 9.1 Positive opinions of the EU, 2003–13 123 12.1 Euro zone and US GDP at constant prices, 2007–14 154 12.2 Public debt, 1999–2014 159 12.3 Unemployment rate, 1999–2014 159 12.4 Current-account balance, 2004–14 168 Unhappy Union.indd 7 21/03/2014 15:33 Acknowledgements MANY POLITICIANS, OFFICIALS, diplomats, academics, think-tankers and fellow journalists have helped us to form our ideas and write this book, some without realising it. A large number of people gave generously of their time and shared their insights (and often their personal notes of events), but wish to remain anonymous. We would like to thank them all. For the Charlemagne columnist covering the twists and turns of the crisis from Brussels, the press corps has been a source of good cheer and comradeship, and a forum for the exchange of information, through endless late-night meetings of European leaders and finance ministers. The colleagues and guests of the “Toucan” dinner club have produced many enlightening and enjoyable evenings. The job of interpreting events has been made much easier thanks to the expertise of scholars who follow the often arcane affairs of the EU. They include staff at the Brussels think-tank, Bruegel – among them Guntram Wolff, Jean Pisani-Ferry, André Sapir, Zsolt Darvas and Silvia Merler – who have offered invaluable expertise over the years. Similarly, Daniel Gros at the Centre for European Policy Studies has been a source of sharp perspective. On questions of Europe in the wider world many have been helpful and incisive, among them Jan Techau at Carnegie Europe, Daniel Keohane at FRIDE, Sir Michael Leigh at the German Marshall Fund of the United States, as well as the many experts of the European Council on Foreign Relations. Philippe Legrain, formerly at the European Commission’s Bureau of European Policy Advisers, has been refreshingly trenchant and forthright in his views of where Europe has gone wrong. We would like to thank Stephen Brough, Penny Williams and Unhappy Union.indd 8 21/03/2014 15:33 Acknowledgements ix Jonathan Harley for incubating this book and seeing it through to completion with charm and patience, despite many interruptions and changes to the manuscript. Andrea Burgess and Roxana Willis at The Economist have been indefatigable researchers in finding data and producing charts. We owe a special thanks to several people who took the time to read drafts of our manuscript and commented on all or parts of it. They include Charles Grant and Simon Tilford at the Centre for European Reform and Heather Grabbe at the Open Society Foundations, as well as our colleagues at The Economist, Edward Carr and Zanny Minton Beddoes. No one can write a book without being a burden on their families. Accordingly, we dedicate this one to our ever-supportive spouses, Sara and Jane. Unhappy Union.indd 9 21/03/2014 15:33 Preface EUROPE HAS LONG PRIDED ITSELF on being a model for the rest of the world of how to reconcile old enemies after centuries of war, blend the power of capitalism with social justice and balance work with leisure. Little matter that Europeans did not generate as much wealth as overworked Americans; Europeans took more time off to enjoy life. And little matter that Europe could not project the same military force as the United States; Europe saw itself as a “normative power”, able to influence the world through its ability to set rules and standards. Some Europhiles even imagined that Europe would “run the 21st century”, as the title of one optimistic book put it.1 The collapse of subprime mortgages in the United States, and the credit crunch that followed, only confirmed such convictions. The single currency, the European Union’s most ambitious project, was seen as a shield against financial turbulence caused by runaway American “ultra-liberalism”, as the French liked to describe the faith in free markets. But when the financial storm blew in from across the Atlantic, the euro turned out to be a flimsy umbrella that flopped over in the wind and dragged away many of the weaker economies. It led to the worst economic and political crisis in Europe since the second world war. Starting in May 2010, first Greece, then Ireland and Portugal were rescued and had to undergo painful internal devaluation, that is, by reducing wages and prices relative to others. The process proved so messy and bitter that, even with hundreds of billions of euros committed to bail-outs, the currency several times came close to breaking up, potentially taking down the single market and perhaps the whole EU with it. The EU’s hope of becoming a global power Unhappy Union.indd 11 21/03/2014 15:33 xii UNHAPPY UNION dissolved as Europe became the world’s basket case. More than once, the United States forcibly pressed its transatlantic allies and economic partners to do more to fix their flawed currency union. At the time of writing, in March 2014, the euro zone has survived the financial crisis – an achievement in itself, but won at too high a price. The euro zone bottomed out of its double-dip recession in 2013. But despite signs of “Europhoria” in markets the danger is far from over. Among Europhiles and Eurosceptics alike, there is a growing belief that the euro has undermined, and may yet destroy, the European Union. Instead of promoting economic integration, euro-zone economies have diverged. Rather than sealing post-war reconciliation, the euro is creating resentment between north and south.

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