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Germany, the Euro and the Euro Crisis

Merkel and Barroso

Merkel and Barroso. Photo: European People’s Party/flickr.

In a recent article, Alexander Reisenbichler and Kimberly J. Morgen argue that ‘Germany won the Euro Crisis’[i]. I doubt that any country can be the winner of a major economic crisis, especially if we are talking about an exporting nation. Of course Germany does benefit from some economic developments of the current Euro Crisis–in particular the low interest rates for German government bonds which reduce public spendings for interets payments on public debt. However, as an exporting nation, Germany depends on stable economic conditions in Europe. Thus a sluggish economic situation in several European economies has a negative impact on German exports and thereby on Germany’s real domestic product (GDP) and labour market. Hence I would argue that Germany benefits from the Euro, not from the Euro Crisis. » More

Europe’s December Surprise?

A pile of Euro notes. Photo: Images Money/Flickr

A pile of Euro notes. Photo: Images of Money/Flickr (by www.TaxFix.co.uk).

Over the past year, Europe has enjoyed calm financial markets. At the core of the market’s comfort were two assumptions about policy. First, that the European governments would do just enough to keep the process of European integration moving forward. Second, that the ECB would, in the words of Mario Draghi, do “whatever it takes” to save the euro. The centerpiece of the ECB’s subsequent efforts was expanded liquidity (through long-term repurchase operations and easier collateral requirements for banks to access ECB liquidity) and a commitment to purchase government bonds to support countries return to market (the OMT program). Even many pessimists who fear that Europe is trapped on a unsustainable, low-growth trajectory remain optimistic that Europe will do what it takes to navigate the near term risks. It may be time to question that optimism.

As many have noted, there is an increasing sense of adjustment fatigue in Europe, reflected in pressure on governments and the rise of anti-austerity, anti-establishment parties across the Eurozone. In rhetorical terms, Europe has responded, and fiscal policy looks likely to be broadly neutral in the year ahead. However, an overall fiscal relaxation that is needed in the euro area as a whole looks unlikely, as peripheral countries can’t afford much additional spending, while the core countries that can spend more seem disinclined to. » More

The Triumph of Politics in Europe

A European flag and a Greek flag

Will Europe's politicians save the Euro? Photo: YoungJ523/flickr

MADRID – Economics, particularly economic theories, always yield in the end to political imperatives. That is why Europe’s fast-changing political landscape, reshaped by electoral insurrections in France and Greece against German-backed fiscal austerity, is bound to affect Europe’s economic policies as well.

Such an imperative has been at work throughout Europe’s postwar history. Indeed, Europe’s shift from the modest customs union of the European Economic Community to the single market and common currency of today’s European Monetary Union was itself a fundamentally political move, one with strategic implications, of course. France wanted to tame German power by harnessing it to the European project, and Germany was prepared to sacrifice the Deutsche Mark for the sake of France’s acceptance of a united Germany, the nightmare of Europe’s recent past.

An economically robust Germany is, without doubt, vital to the European project, if only because history has shown how dangerous an unhappy Germany can be. Indeed, it was thanks to the euro – and the captive European market that goes with it – that Germany today is the world’s second-leading exporter (China surpassed it in 2009). » More

Niall Ferguson: Can Europe Fail and Is America Next?

Niall Ferguson

Niall Ferguson. Image: The Aspen Institute//flickr

Probably no questions are more relevant today than those Niall Ferguson considered in his lecture on Monday (30 January 2012), hosted by the Swiss Institute of International Studies, at the University of Zurich.  Fresh from the World Economic Forum (WEF) in Davos, the answers he gave were far from comforting:  Can Europe collapse? Of course it can.  Is America next?  Maybe.

But more importantly, Ferguson told us, we should have seen this coming. Ten years ago, in an article he co-authored in Foreign Affairs, he predicted that Europe’s newly minted Economic and Monetary Union (EMU) was doomed without a fiscal union to accompany it.  Indeed, Ferguson was one of the original ‘Cassandras’ of the project, warning as early as 2000 that “monetary unions can be undone by fiscal imbalances.”  This, he told us, was one of the lessons of history.  The closest precedent of the EMU, after all, was the obscure Latin Monetary Union, comprising France, Belgium, Switzerland, Italy, and Greece between 1865 and 1927.  Why is it so obscure?  Because it was destroyed by “asymmetric fiscal problems” – by the divergence between French fiscal probity, on the one hand, and Italian and Greek fiscal laxity on the other. » More

The End of European Exceptionalism?

The historical expansion of the EU

The historical expansion of the EU. Image: Ssolbergj/Wikipedia

Ten years ago, people were going long on Europe.  In 2002, an influential article in Policy Review described Europe as “entering a post-historical paradise of peace and relative prosperity,” even “the realization of Kant’s Perpetual Peace.”  Those familiar with that article, Robert Kagan’s “Power and Weakness,” know that this was praise of a certain kind.  What made this Europe possible, according to Kagan was, actually: “the United States… mired in history, exercising power [out] in the anarchic, Hobbesian world.”  Though Kagan clearly did not believe that Europe circa 2002 was an illustration of Kant’s vision of human progress in history — in which the working out of our “unsocial sociability” would eventually lead to a global alliance of peaceful republics — it was the image he used.  And it was a compelling one.

When that article was written, the idea of Europe as paradise was plausible. The Euro had just entered circulation, membership of the EU was about to reach for the first time behind the old iron curtain, and people were getting used to the prospect of Europe as a second superpower alongside the United States. Perhaps Kagan’s article was so influential because it suggested what few at the time believed: that what Europe had achieved in preceding decades would not easily or inevitably be repeated elsewhere in the decades to come, that European advances were themselves contingent and fragile.  That power was not obsolete. » More

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