The Euro Marriage

The UACES Network |

By Miguel Otero-Iglesias, Assistant Professor of International Political Economy at ESSCA School of Management and Research Fellow at the London School of Economics

The creation of the euro is an epoch-making event. For the first time in history independent nation-states have decided to merge their monetary sovereignties in a single currency. From the start, however, the project has been based on a marriage between France and Germany. France has always been the weaker partner in the relationship. We cannot forget that before the Euro, there was a de facto Deutsche Mark-zone in Europe. Economically weaker EU member states, including France, pegged their currencies to the Deutsche Mark in order to be better protected from the inherent instabilities of an increasingly globalised world. The idea of fully independent monetary sovereignty before the euro is therefore a myth. When the Berlin Wall fell and Germany claimed its right to unify, the French seized the opportunity and proposed an irreversible marriage. Paris would back German unification and Berlin would give up its mighty Deutsche Mark for ever.

As in most modern marriages, there were also children involved from previous (historic) relationships. Germany was keen to include its satellites: Austria, the Netherlands and Finland, while France was eager to bring in its Mediterranean followers: Italy, Spain and Portugal. French exporters would have never allowed their Italian and Spanish counterparts to keep their currencies and devalue every few years to regain competitiveness. Greece was seen with suspicion by both Germany and France, but eventually they agreed to adopt the child from the cradle of democracy. As in every family, the strong parent, Germany, established the norms of conduct. Thus the Growth and Stability Pact (GSP) was agreed. Unfortunately, however, both Germany and France were the first to breach it. As many parents, they preached one way and behaved the opposite way. Discipline-loose children such as Greece followed suit and breached the SGP several times. Spain and Ireland, however, were well-behaved children and did not break the SGP once. In these two countries the current economic crisis is not a product of public debt; rather it is a consequence of the internal current account imbalances that are common in any currency union. Spain, in order to grow and stand on its own feet, received considerable sums of money from its parents. Unfortunately for the whole family most of this investment went into an unsustainable real estate bubble.

The situation within the family is now difficult. Spain owes quite a bid of money to its parents and it is struggling to pay back its debts. Germany, the largest income-earner and therefore the rule-maker, is unhappy about this situation. It is not only Spain that is in trouble. Greece, Ireland and Portugal are bankrupt and Italy is threatened by large public debt. What has been Germany’s response? It has used this opportunity to impose more discipline upon the more profligate members of the family. It has reinforced the GSP. It has asked them to enshrine budget discipline in their own constitutions and to reform their labour markets to make them more productive and competitive. In essence, it has pursued its long-term goal to establish a stability union. Germany is applying sticks to discipline its children, but as in every family after the sticks you need some carrots. The fiscal union proposed by Germany does not include Eurobonds, there is no democratically underpinned federal budget to overcome asymmetric shocks, the European Central Bank cannot act as a lender of last resort, there is no growth strategy for the periphery. Thus, this is not a fiscal union. It resembles more a surveillance union. Germany feels strong because none of the children dares to leave the shelter of the parents’ house. This is so far true. Germany needs to be careful though because without carrots some of the children may revolt and this might trigger headaches in Berlin. This in turn might push France to reconsider the irreversibility of the marriage. If that happens, Europe will be in big trouble.

This article was first published in the Czech daily newspaper Lidove Noviny.  It is published with permission.


I am Assistant Professor in International Political Economy at ESSCA School of Management, and currently also Adjunct Lecturer at the University of Oxford and Research Fellow at the London School of Economics and Political Science. My research areas are the Governance of Money and Finance and EU-China Macroeconomic Diplomacy.