(economist Books) John Peet, Anton La Guardia, The Economist Unhappy Union How The Euro Crisis And Europe Can Be Fixed The Economist (2014) [628207]

U N H A P P Y U N I O N
J O H N P E E T i s E ur ope e di t o r a nd a f or m e r B r us s e l s c or r e s ponde nt of T he
E c onom i s t . H e w a s pr e vi ous l y W a s hi ngt on c or r e s ponde nt a nd bus i ne s s
a f f a i r s e di t or .
A N T O N L A G U A R D I A i s B r us s e l s c or r e s ponde nt of T he E c onom i s t a nd w r i t e s
t he C ha r l e m a gne c ol um n. H e w a s pr e vi ous l y T he E c onom i s t ’ s de f e nc e
c or r e s ponde nt , a f t e r w or ki ng f or t w o de c a de s a s a f or e i gn c or r e s ponde nt i n
t he M i ddl e E a s t a nd A f r i c a . H e i s t he a ut hor of H ol y L and, U nhol y W ar :
I s r ae l i s and P al e s t i ni ans ( P e ngui n, 2006) .

O T H E R E C O N O M I S T B O O K S
G u i d e t o A n a l y s i n g C o m p a n i e s
G u i d e t o B u s i n e s s M o d e l l i n g
G u i d e t o B u s i n e s s P l a n n i n g
G u i d e t o C a s h M a n a g e m e n t
G u i d e t o C o m m o d i t i e s
G u i d e t o D e c i s i o n M a k i n g
G u i d e t o E c o n o m i c I n d i c a t o r s
G u i d e t o E m e r g i n g M a r k e t s
G u i d e t o t h e E u r o p e a n U n i o n
G u i d e t o F i n a n c i a l M a n a g e m e n t
G u i d e t o F i n a n c i a l M a r k e t s
G u i d e t o H e d g e F u n d s
G u i d e t o I n v e s t m e n t S t r a t e g y
G u i d e t o M a n a g e m e n t I d e a s a n d G u r u s
G u i d e t o M a n a g i n g G r o w t h
G u i d e t o O r g a n i s a t i o n D e s i g n
G u i d e t o P r o j e c t M a n a g e m e n t
G u i d e t o S u p p l y C h a i n M a n a g e m e n t
N u m b e r s G u i d e
S t y l e G u i d e
B o o k o f B u s i n e s s Q u o t a t i o n s
B o o k o f I s m s
B o o k o f O b i t u a r i e s
B r a n d s a n d B r a n d i n g
B u s i n e s s C o n s u l t i n g
B u s i n e s s S t r a t e g y
B u y i n g P r o f e s s i o n a l S e r v i c e s
D o i n g B u s i n e s s i n C h i n a
E c o n o m i c s
M a n a g i n g T a l e n t
M a n a g i n g U n c e r t a i n t y
M a r k e t i n g
M a r k e t i n g f o r G r o w t h
M e g a c h a n g e – t h e w o r l d i n 2 0 5 0
M o d e r n W a r f a r e , I n t e l l i g e n c e a n d D e t e r r e n c e
O r g a n i s a t i o n C u l t u r e
S u c c e s s f u l S t r a t e g y E x e c u t i o n
T h e W o r l d o f B u s i n e s s
D i r e c t o r s : a n A – Z G u i d e
E c o n o m i c s : a n A – Z G u i d e

I n v e s t m e n t : a n A – Z G u i d e
N e g o t i a t i o n : a n A – Z G u i d e
P o c k e t W o r l d i n F i g u r e s

U N H A P P Y U N I O N
How the euro crisis – and Europe – can be fixed
J o h n P e e t and A n t o n L a G u a r d i a

T H E E C O N O M I S T I N A S S O C I A T I O N W I T H
P R O F I L E B O O K S L T D A N D P U B L I C A F F A I R S
C o p y r i g h t © T h e E c o n o m i s t N e w s p a p e r L t d , 2 0 1 4
T e x t c o p y r i g h t © J o h n P e e t a n d A n t o n L a G u a r d i a , 2 0 1 4
F i r s t p u b l i s h e d i n 2 0 1 4 b y P r o f i l e B o o k s L t d . i n G r e a t B r i t a i n .
P u b l i s h e d i n 2 0 1 4 i n t h e U n i t e d S t a t e s b y P u b l i c A f f a i r s ™ , a M e m b e r o f t h e P e r s e u s B o o k s G r o u p
A l l r i g h t s r e s e r v e d . N o p a r t o f t h i s b o o k m a y b e r e p r o d u c e d , s t o r e d i n o r i n t r o d u c e d i n t o a
r e t r i e v a l s y s t e m , o r t r a n s m i t t e d , i n a n y f o r m o r b y a n y m e a n s ( e l e c t r o n i c , m e c h a n i c a l ,
p h o t o c o p y i n g , r e c o r d i n g o r o t h e r w i s e ) , w i t h o u t t h e p r i o r w r i t t e n p e r m i s s i o n o f b o t h t h e c o p y r i g h t
o w n e r a n d t h e p u b l i s h e r o f t h i s b o o k , e x c e p t i n t h e c a s e o f b r i e f q u o t a t i o n s e m b o d i e d i n c r i t i c a l
a r t i c l e s a n d r e v i e w s . F o r i n f o r m a t i o n , a d d r e s s P u b l i c A f f a i r s , 2 5 0 W e s t 5 7 t h S t r e e t , 1 5 t h F l o o r ,
N e w Y o r k , N Y 1 0 1 0 7 .
T h e g r e a t e s t c a r e h a s b e e n t a k e n i n c o m p i l i n g t h i s b o o k . H o w e v e r , n o r e s p o n s i b i l i t y c a n b e
a c c e p t e d b y t h e p u b l i s h e r s o r c o m p i l e r s f o r t h e a c c u r a c y o f t h e i n f o r m a t i o n p r e s e n t e d .
W h e r e o p i n i o n i s e x p r e s s e d i t i s t h a t o f t h e a u t h o r a n d d o e s n o t n e c e s s a r i l y c o i n c i d e w i t h t h e
e d i t o r i a l v i e w s o f T h e E c o n o m i s t N e w s p a p e r .
W h i l e e v e r y e f f o r t h a s b e e n m a d e t o c o n t a c t c o p y r i g h t – h o l d e r s o f m a t e r i a l p r o d u c e d o r c i t e d i n
t h i s b o o k , i n t h e c a s e o f t h o s e i t h a s n o t b e e n p o s s i b l e t o c o n t a c t s u c c e s s f u l l y , t h e a u t h o r a n d
p u b l i s h e r s w i l l b e g l a d t o m a k e a m e n d m e n t s i n f u r t h e r e d i t i o n s . P u b l i c A f f a i r s b o o k s a r e a v a i l a b l e
a t s p e c i a l d i s c o u n t s f o r b u l k p u r c h a s e s i n t h e U . S . b y c o r p o r a t i o n s , i n s t i t u t i o n s , a n d o t h e r
o r g a n i z a t i o n s . F o r m o r e i n f o r m a t i o n , p l e a s e c o n t a c t t h e S p e c i a l M a r k e t s D e p a r t m e n t a t t h e
P e r s e u s B o o k s G r o u p , 2 3 0 0 C h e s t n u t S t r e e t , S u i t e 2 0 0 , P h i l a d e l p h i a , P A 1 9 1 0 3 , c a l l ( 8 0 0 ) 8 1 0 –
4 1 4 5 , e x t . 5 0 0 0 , o r e – m a i l s p e c i a l . m a r k e t s @ p e r s e u s b o o k s . c o m .
L i b r a r y o f C o n g r e s s C o n t r o l N u m b e r : 2 0 1 4 9 3 6 6 7 6
H C I S B N : 9 7 8 – 1 – 6 1 0 3 9 – 4 4 9 – 9
e – b o o k I S B N : 9 7 8 – 1 – 6 1 0 3 9 – 4 5 0 – 5
F i r s t E d i t i o n

C o n t e n t s
L i s t of f i gur e s
A c know l e dge m e nt s
P r e f a c e
1 “ I f t he e ur o f a i l s , E ur ope f a i l s ”
2 F r om t he or i gi ns t o M a a s t r i c ht
3 H ow i t a l l w or ks
4 B ui l d- up t o a c r i s i s
5 T r i c he t ’ s t e s t
6 S upe r M a r i o
7 T he c ha ngi ng ba l a nc e of pow e r
8 I n, out , s ha ke i t a l l a bout
9 D e m oc r a c y a nd i t s di s c ont e nt s
10 H ow t he e ur o s poi l t a ny ot he r bus i ne s s
11 E ur ope ’ s pl a c e i n t he w or l d
12 A f t e r t he s t or m
N ot e s
A p p e n d i c e s
1 T i m e l i ne
2 T r e a t i e s , r e gul a t i ons a nd pa c t s
3 F ur t he r r e a di ng
4 H ow T he E c onom i s t s a w i t a t t he t i m e

I nde x

L i s t o f f i g u r e s
4.1 G D P , 1999–2014
4.2 T e n- ye a r bond yi e l ds , 1995–2010
5.1 T e n- ye a r bond yi e l ds , 2010–2012
6.1 S pa i n: f i ve – ye a r C D S pr e m i um s on s ove r e i gn a nd ba nk de bt , 2007–
12
6.2 T e n- ye a r bond yi e l ds , J ul y 2011–D e c e m be r 2013
6.3 I nt e r e s t on l oa ns t o non- f i na nc i a l c or por a t i ons up t o €1m , 2007–14
9.1 P os i t i ve opi ni ons of t he E U , 2003–13
12.1 E ur o z one a nd U S G D P a t c ons t a nt pr i c e s , 2007–14
12.2 P ubl i c de bt , 1999–2014
12.3 U ne m pl oym e nt r a t e , 1999–2014
12.4 C ur r e nt – a c c ount ba l a nc e , 2004–14

A c k n o w l e d g e m e n t s
MANY POLITICIANS, OFFICIALS , di pl om a t s , a c a de m i c s , t hi nk- t a nke r s a nd
f e l l ow j our na l i s t s ha ve he l pe d us t o f or m our i de a s a nd w r i t e t hi s book,
s om e w i t hout r e a l i s i ng i t . A l a r ge num be r of pe opl e ga ve ge ne r ous l y of
t he i r t i m e a nd s ha r e d t he i r i n s i ght s ( a nd of t e n t he i r pe r s ona l not e s of
e ve nt s ) , but w i s h t o r e m a i n a nonym ous . W e w oul d l i ke t o t ha nk t he m a l l .
F or t he C ha r l e m a gne c ol um ni s t c ove r i ng t he t w i s t s a nd t ur ns of t he
c r i s i s f r om B r us s e l s , t he pr e s s c or ps ha s be e n a s our c e of good c he e r a nd
c om r a de s hi p, a nd a f or um f or t he e xc ha nge of i nf or m a t i on, t hr ough
e ndl e s s l a t e – ni ght m e e t i ngs of E ur ope a n l e a de r s a nd f i na nc e m i ni s t e r s .
T he c ol l e a gue s a nd gue s t s of t he “ T ouc a n” di nne r c l ub ha ve pr oduc e d
m a ny e nl i ght e ni ng a nd e nj oya bl e e ve ni ngs .
T he j ob of i nt e r pr e t i ng e ve nt s ha s be e n m a de m uc h e a s i e r t ha nks t o t he
e xpe r t i s e of s c hol a r s w ho f ol l ow t he of t e n a r c a ne a f f a i r s of t he E U . T he y
i nc l ude s t a f f a t t he B r us s e l s t h i nk- t a nk, B r ue ge l – a m ong t he m G unt r a m
W ol f f , J e a n P i s a ni – F e r r y , A ndr é S a pi r , Z s ol t D a r va s a nd S i l vi a M e r l e r –
w ho ha ve of f e r e d i nva l ua bl e e xpe r t i s e ove r t he ye a r s . S i m i l a r l y , D a ni e l
G r os a t t he C e n t r e f or E ur ope a n P ol i c y S t udi e s ha s be e n a s our c e of s ha r p
pe r s pe c t i ve . O n que s t i ons of E ur ope i n t he w i de r w or l d m a ny ha ve be e n
he l pf ul a nd i nc i s i ve , a m ong t he m J a n T e c ha u a t C a r ne gi e E ur ope , D a ni e l
K e oha ne a t F R I D E , S i r M i c ha e l L e i gh a t t he G e r m a n M a r s ha l l F und of t he
U ni t e d S t a t e s , a s w e l l a s t he m a ny e xpe r t s of t he E ur ope a n C ounc i l on
F or e i gn R e l a t i ons . P hi l i ppe L e gr a i n, f or m e r l y a t t he E ur ope a n
C om m i s s i on’ s B ur e a u of E ur ope a n P ol i c y A dvi s e r s , ha s be e n r e f r e s hi ngl y
t r e nc ha nt a nd f or t hr i ght i n hi s vi e w s of w he r e E ur ope ha s gone w r ong.

W e w oul d l i ke t o t ha nk S t e phe n B r ough, P e nny W i l l i a m s a nd J ona t ha n
H a r l e y f or i nc uba t i ng t hi s book a nd s e e i ng i t t hr ough t o c om pl e t i on w i t h
c ha r m a nd pa t i e nc e , de s pi t e m a ny i nt e r r upt i ons a nd c ha nge s t o t he
m a nus c r i pt . A ndr e a B ur ge s s a nd R oxa na W i l l i s a t T he E c onom i s t ha ve
be e n i nde f a t i ga bl e r e s e a r c he r s i n f i ndi ng da t a a nd pr oduc i ng c ha r t s .
W e ow e a s pe c i a l t ha nks t o s e ve r a l pe opl e w ho t ook t he t i m e t o r e a d
dr a f t s of our m a nus c r i pt a nd c om m e nt e d on a l l or pa r t s of i t . T he y i nc l ude
C ha r l e s G r a nt a nd S i m on T i l f or d a t t he C e nt r e f or E ur ope a n R e f or m a nd
H e a t he r G r a bbe a t t he O pe n S oc i e t y F ounda t i ons , a s w e l l a s our c ol l e a gue s
a t T he E c onom i s t , E dw a r d C a r r a nd Z a nny M i nt on B e ddoe s .
N o one c a n w r i t e a book w i t h out be i ng a bur de n on t he i r f a m i l i e s .
A c c or di ngl y , w e de di c a t e t hi s one t o our e ve r – s uppor t i ve s pous e s , S a r a a nd
J a ne .

P r e f a c e
EUROPE HAS LONG PRIDED ITSELF on be i ng a m ode l f or t he r e s t of t he w or l d
of how t o r e c onc i l e ol d e ne m i e s a f t e r c e nt ur i e s of w a r , bl e nd t he pow e r of
c a pi t a l i s m w i t h s oc i a l j us t i c e a nd ba l a nc e w or k w i t h l e i s ur e . L i t t l e m a t t e r
t ha t E ur ope a ns di d not ge ne r a t e a s m uc h w e a l t h a s ove r w or ke d A m e r i c a ns ;
E ur ope a ns t ook m or e t i m e of f t o e nj oy l i f e . A nd l i t t l e m a t t e r t ha t E ur ope
c oul d not pr oj e c t t he s a m e m i l i t a r y f or c e a s t he U ni t e d S t a t e s ; E ur ope s a w
i t s e l f a s a “ nor m a t i ve pow e r ” , a bl e t o i nf l ue nc e t he w or l d t hr ough i t s
a bi l i t y t o s e t r ul e s a nd s t a nda r ds . S om e E ur ophi l e s e ve n i m a gi ne d t ha t
E ur ope w oul d “ r un t he 21s t c e nt ur y” , a s t he t i t l e of one opt i m i s t i c book
put i t .1
T he c ol l a ps e of s ubpr i m e m or t ga ge s i n t he U ni t e d S t a t e s , a nd t he
c r e di t c r unc h t ha t f ol l ow e d, onl y c onf i r m e d s uc h c onvi c t i ons . T he s i ngl e
c ur r e nc y , t he E ur ope a n U ni on’ s m os t a m bi t i ous pr oj e c t , w a s s e e n a s a
s hi e l d a ga i ns t f i na nc i a l t ur bul e nc e c a us e d by r una w a y A m e r i c a n “ ul t r a –
l i be r a l i s m ” , a s t he F r e nc h l i ke d t o de s c r i be t he f a i t h i n f r e e m a r ke t s . B ut
w he n t h e f i na nc i a l s t or m bl e w i n f r om a c r os s t he A t l a nt i c , t he e ur o t ur ne d
out t o be a f l i m s y um br e l l a t ha t f l oppe d ove r i n t he w i nd a nd dr a gge d
a w a y m a ny of t he w e a ke r e c onom i e s . I t l e d t o t he w or s t e c onom i c a nd
pol i t i c a l c r i s i s i n E ur ope s i nc e t he s e c ond w or l d w a r .
S t a r t i ng i n M a y 2010, f i r s t G r e e c e , t he n I r e l a nd a nd P or t uga l w e r e
r e s c ue d a nd ha d t o unde r go pa i nf ul i nt e r na l de va l ua t i on, t ha t i s , by
r e duc i ng w a ge s a nd pr i c e s r e l a t i ve t o ot he r s . T he pr oc e s s pr ove d s o m e s s y
a nd bi t t e r t ha t , e ve n w i t h hundr e ds of bi l l i ons of e ur os c om m i t t e d t o ba i l –
out s , t he c ur r e nc y s e ve r a l t i m e s c a m e c l os e t o br e a ki ng up, pot e nt i a l l y
t a ki ng dow n t he s i ngl e m a r ke t a nd pe r ha ps t he w hol e E U w i t h i t . T he E U ’ s

hope of be c om i n g a gl oba l pow e r di s s ol ve d a s E ur ope be c a m e t he w or l d’ s
ba s ke t c a s e . M or e t ha n onc e , t he U ni t e d S t a t e s f or c i bl y pr e s s e d i t s
t r a ns a t l a nt i c a l l i e s a nd e c onom i c pa r t ne r s t o do m or e t o f i x t he i r f l a w e d
c ur r e nc y uni on.
A t t he t i m e of w r i t i ng, i n M a r c h 2014, t he e ur o z one ha s s ur v i ve d t he
f i na nc i a l c r i s i s – a n a c hi e ve m e nt i n i t s e l f , but w on a t t oo hi gh a pr i c e . T he
e ur o z on e bot t om e d out of i t s doubl e – di p r e c e s s i on i n 2013. B ut de s pi t e
s i gns of “ E ur ophor i a ” i n m a r ke t s t he da nge r i s f a r f r om ove r .
A m ong E ur ophi l e s a nd E ur os c e pt i c s a l i ke , t he r e i s a gr ow i ng be l i e f
t ha t t he e ur o ha s unde r m i ne d, a nd m a y ye t de s t r oy , t he E ur ope a n U ni on.
I ns t e a d of pr om ot i ng e c onom i c i nt e gr a t i on, e ur o- z one e c onom i e s ha ve
di ve r ge d. R a t he r t ha n s e a l i ng p os t – w a r r e c onc i l i a t i on, t he e ur o i s c r e a t i ng
r e s e nt m e nt be t w e e n nor t h a nd s out h. F a r f r om s e t t l i ng t he a ge – ol d G e r m a n
que s t i on, G e r m a ny ha s e m e r ge d a s a l l – pow e r f ul . T he de c l i ne of F r a nc e ha s
a c c e l e r a t e d, a nd t he ungove r na bi l i t y of I t a l y ha s be e n r e a f f i r m e d. T e ns i ons
be t w e e n e ur o “ i ns ” a nd “ out s ” ha ve i nc r e a s e d, pa r t i c ul a r l y i n t he c a s e of
t he U K , w hi c h now hove r s e ve r c l os e r t o t he e xi t .
T he c hr oni c de m oc r a t i c pr obl e m ha s be c om e a c ut e : t he E U i s i nt r udi ng
e ve r m or e de e pl y i nt o na t i ona l pol i c ym a ki ng, pa r t i c ul a r l y i n t he e ur o
z one , w i t hout be c om i ng a ny m or e a c c ount a bl e t o c i t i z e ns . P e r ve r s e l y , t he
c l e a r e s t s i gn of a c om m on pol i t i c a l i de nt i t y , t he E ur ope a n “ de m os ” t ha t
f e de r a l i s t s hope d w oul d e m e r ge , i s t o be f ound i n a n t i – E ur ope a n
m ove m e nt s .
F or now t he r i ot s a nd c l ouds of t e a r ga s i n G r e e c e a nd t h e m a s s
pr ot e s t s by S pa i n’ s i ndi gnados m a y ha ve f a de d a w a y . B ut a l m os t
e ve r yw he r e , a p a r t f r om G e r m a ny , w hi c h ha s ba r e l y f e l t t he c r i s i s ,
i ndi gna nt vot e r s ha ve t hr ow n out i nc um be nt gove r nm e nt s a nd a ba ndone d
c e nt r i s t pa r t i e s i n l a r ge num be r s . A nt i – E U a nd a nt i – e ur o pa r t i e s a r e on t he
r i s e , of bot h l e f t – a nd r i ght – w i ng va r i e t i e s , i n bot h c or e a nd pe r i phe r y
c ount r i e s , a nd i n bot h e ur o i ns a nd e ur o out s . T he s c a r i e s t a r e i n G r e e c e ,
w hi c h h a s bot h r a di c a l l e f t i s t s a nd ne o- N a z i e xt r e m i s t s , a nd ha s w i t ne s s e d
m ur de r ous vi ol e nc e a m ong t he i r f ol l ow e r s . B ut t he m os t c ons e que nt i a l
m a y ye t be t h e s c r ubbe d- up, be s ui t e d popul i s t s i n c ount r i e s s uc h a s
F r a nc e , t he N e t he r l a nds a nd t h e U K , w hi c h w e r e ha r dl y t he w or s t hi t by
t he de bt c r i s i s . T he y ha ve a l r e a dy c ha nge d t he t e r m s of t h e E ur ope a n
de ba t e i n t he s e c ount r i e s . O nc e t he c ha m pi on of E U e nl a r ge m e nt , t he U K

i s i nc r e a s i ngl y t ur ni ng a ga i ns t t he c he r i s he d r i ght of f r e e m ove m e nt of
w or ke r s , a nd a ga i ns t t he E U i t s e l f .
A s t he c ount r i e s of t he e ur o- z one pe r i phe r y s e e k t o r e ga i n
c om pe t i t i ve ne s s , t he i r m os t s t r i ki ng e xpor t ha s be e n young e m i gr a nt s i n
s e a r c h of j obs a br oa d. T he s e a r e no l onge r t he m a nua l w or ke r s of
ye s t e r ye a r w ho f i l l e d t he f a c t or i e s of G e r m a ny , t he m i ne s of B e l gi um a nd
t he b ui l di ng s i t e s of t he U K . N o w i t i s t he young gr a dua t e s w ho a r e on t he
m ove . I n P or t uga l , t he pos t – c ol oni a l f l ow ha s r e ve r s e d, a s ho pe f ul s he a d
out t o B r a z i l , A ngol a a nd M oz a m bi que i n s e a r c h of a be t t e r l i f e . I n
I r e l a nd, s om e c hur c he s ha ve s e t up w e bc a m s s o t ha t é m i gr é pa r i s hi one r s
c a n w a t c h s e r vi c e s ba c k hom e . M a ny ha ve m ove d t o ot he r pa r t s of E ur ope ,
not a bl y G e r m a ny .
T he s t or y of how t he E ur ope a n pr oj e c t w a s bor n, how t he e ur o ne a r l y
di e d, ho w i t w a s s a ve d a nd how t he E U s houl d c onf r ont t he da nge r s a he a d
i s t h e s u bj e c t of t hi s book. T he a ppe ndi c e s pr ovi de a t i m e l i ne , a gl os s a r y
a nd t he hi s t or y of t he c r i s i s a s t ol d t hr ough c ove r s of T he E c onom i s t .
C ha pt e r 1 r e c ount s t he da r ke s t da ys , w he n t he E ur ope a n C e nt r a l B a nk
( E C B ) , t he I nt e r na t i ona l M one t a r y F und ( I M F ) a nd ot he r s m a de s e c r e t
pr e pa r a t i ons f or t he de pa r t ur e of G r e e c e f r om t he e ur o, a nd t he pos s i bl e
c ol l a ps e of t he c ur r e nc y z one . T he c ons e que nc e s , a l l a gr e e d, w e r e
i nc a l c ul a bl e .
C ha pt e r 2 s ho w s how t he i de a of E ur ope a n i nt e gr a t i on w a s bor n f r om
t he p ol i t i c a l ne c e s s i t i e s of t he e a r l y 1950s , w i t h E ur ope e m e r gi ng f r om t he
r ui ns of t he s e c o nd w or l d w a r a nd t he n ha vi ng t o c onf r ont t he c ha l l e nge of
t he c ol d w a r . T he e ur o w a s l a unc he d a s a r e s ul t of t he f a i l ur e of r e pe a t e d
a t t e m pt s t o f i x e xc ha nge r a t e s be t w e e n E ur ope a n e c onom i e s , a nd t he
de s i r e t o a nc hor a uni f i e d G e r m a ny m or e f i r m l y w i t hi n E ur ope a f t e r t he
c ol l a ps e of t he B e r l i n W a l l .
T he s ys t e m t ha t w a s c r e a t e d t hr ough s uc c e s s i ve t r e a t i e s w a s a c om pl e x
hybr i d w i t h e l e m e nt s of f e de r a l i s m a nd i nt e r gove r nm e nt a l i s m , a
pa nt om i m e hor s e t ha t w a s pa r t U ni t e d S t a t e s a nd pa r t U ni t e d N a t i ons .
C ha pt e r 3 e xp l a i ns t he f unc t i oni ng of t he E U , a nd t he f l a w e d s t r uc t ur e of
t he e ur o, t o he l p m a ke c l e a r how E ur ope a ns m a na ge d, a nd m i s m a na ge d,
t he c r i s i s .
C ha pt e r 4 s ho w s how t he l a unc h of t he e ur o w a s a t f i r s t m e t w i t h
s c e pt i c i s m by out s i de r s , t he n t r e a t e d w i t h hubr i s by i ns i de r s . B l i nke r e d by

t he f i s c a l r ul e s , E ur ope a n i ns t i t ut i ons w e r e f or t he m os t pa r t una w a r e of
t he r e a l da nge r t o t he m one t a r y uni on. I t di d not c om e onl y , or m a i nl y ,
f r om t he a c c um ul a t i on of de f i c i t s a nd de bt , w hi c h be c a m e e a s i e r f or m a ny
c ount r i e s t o f i na nc e a s i nt e r e s t r a t e s f e l l . R a t he r , t he bi gge r m e na c e c a m e
f r om u nde r l yi ng e xt e r na l i m ba l a nc e s , w i t h c ur r e nt – a c c ount de f i c i t s
a l l ow e d t o ba l l oon i n t he be l i e f t ha t t he s e w oul d a l w a ys be f i na nc e d w i t hi n
a c ur r e nc y uni on.
A s t he f i na nc i a l c r i s i s t ur ne d i nt o a de bt c r i s i s i n e a r l y 2010, E ur ope a n
l e a de r s a nd i ns t i t ut i ons m uddl e d t hr ough f r om s um m i t t o s um m i t ,
de vi s i ng r e s pons e s t ha t w e r e a l w a ys t oo l i t t l e , t oo l a t e , a nd r a i s e d t he c os t
f or a l l . T he r e w e r e t w o br oa d p ha s e s , c oi nc i di ng r oughl y w i t h t he t e nur e s
of J e a n- C l a ude T r i c he t a nd M a r i o D r a ghi a s pr e s i de nt s of t he E C B , a s
not e d i n C ha pt e r s 5 a nd 6 .
F i r s t t he r e w a s a pe r i od of ba nk i ng c r i s e s , ba i l – out s , a us t e r i t y a nd de bt
r e s t r uc t ur i ng – f oc us e d m os t a c ut e l y i n G r e e c e . T hi s i nc r e a s i ngl y f r a ught
t i m e c ul m i na t e d i n a ngr y c onf r ont a t i ons a t t he G 20 s um m i t i n C a nne s i n
N ove m be r 2011, w he r e t he pr i m e m i ni s t e r s of G r e e c e a nd I t a l y w e r e
s um m one d f or a dr e s s i ng- dow n by f e l l ow l e a de r s a nd s ubs e que nt l y pus he d
out of of f i c e . I n t he s e c ond ph a s e t he r e w a s a gr ow i ng r e a l i s a t i on of t he
ne e d t o c om e up w i t h a m or e s ys t e m i c r e s pons e . S e e ki ng t o ha l t t he
“ doom – l oop” , i n w hi c h w e a k ba nks a nd w e a k gove r nm e nt s w e r e dr a ggi ng
e a c h ot h e r dow n, l e a de r s e m ba r ke d on t he pr oc e s s of c r e a t i ng a ba nki ng
uni on i n J une 2012. S oon t he r e a f t e r , t he E C B s t e ppe d i n a s a m or e c r e di bl e
l e nde r of l a s t r e s or t f or gove r nm e nt s a f t e r D r a ghi de c l a r e d t he ba nk w oul d
do “ w ha t e ve r i t t a ke s ” t o s t op t he e ur o f r om br e a ki ng up.
T he c r i s i s ha s pr of oundl y c ha nge d r e l a t i ons w i t hi n t he E U . I t ha s
c onf i r m e d G e r m a ny a s t he pr e dom i na nt pow e r i n E ur ope ; i t ha s s hi f t e d
i ns t i t ut i ona l pow e r w i t hi n B r us s e l s f r om t he E ur ope a n C om m i s s i on t o
na t i ona l gove r nm e nt s ; a nd i t ha s c a us e d a gr ow i ng t e ns i on be t w e e n e ur o
i ns a nd out s . T hi s t r a ns f or m a t i on i s de s c r i be d i n C ha pt e r s 7 a nd 8 .
T he c r i s i s ha s a l s o w i de ne d t he de m oc r a t i c de f i c i t i n E ur ope , w hi c h t he
gr ow i ng pow e r of t he E ur ope a n P a r l i a m e nt ha s be e n una bl e t o f i l l , a s
e xpl a i ne d i n C ha pt e r 9 . M o r e ove r , i t ha s di s r upt e d t he c or e bus i ne s s of t he
E U t ha t i s of t e n out of t he he a dl i ne s , f r om t he s i ngl e m a r ke t t o t r a de
ne got i a t i ons , a s s e t out i n C ha pt e r 10 , a s w e l l a s t he E U ’ s hope of e xe r t i ng
gr e a t e r i nf l ue nc e on w or l d a f f a i r s , a s or r y t a l e r e c ount e d i n C ha pt e r 11 .

T he c onc l udi ng C ha pt e r 12 a s s e s s e s t he da m a ge done by c om pa r i ng
t he pe r f or m a nc e of t he e ur o z one s i nc e t he be gi nni ng of t he gl oba l
f i na nc i a l c r i s i s w i t h t ha t of t he U ni t e d S t a t e s . I t t r i e s t o dr a w l e s s ons f r om
t he uphe a va l a nd of f e r s r e c om m e nda t i ons f or r e f or m . T he m a i n r i s ks t o
t he e ur o z one , a nd t o t he w i de r E ur ope a n U ni on, a r e now pr e dom i na nt l y
e c onom i c a nd pol i t i c a l . T he r e c ove r y i s s t i l l w e a k, m a ki ng i t ha r de r t o
br i ng dow n una c c e pt a bl y hi gh une m pl oym e nt a nd l e a vi ng t he e ur o z one
vul ne r a bl e t o a t r i pl e – di p r e c e s s i on, i f not out r i ght de f l a t i on. I n t ur n,
e c onom i c s t a gna t i on w i l l w or s e n t he gr ow i ng pol a r i s a t i on of E ur ope a n
pol i t i c s .
T he a c t i ons of E ur ope a n l e a de r s m a y ha ve a ve r t e d c ol l a ps e i n t he s hor t
t e r m , but t he y h a ve not f ound a l a s t i ng s ol ut i on. T he E C B ’ s b ond- buyi ng
pol i c y s t a bi l i s e d de bt m a r ke t s but i s unt e s t e d, a nd D r a ghi ’ s gr e a t bl uf f
m a y not hol d f or e ve r . T he de ve l opm e nt of “ e c onom i c gove r na nc e ” ,
i nvol vi ng t ough e r f i s c a l r ul e s a n d de e pe r i nt r us i on by B r us s e l s i ns t i t ut i ons
i nt o na t i ona l e c onom i c pol i c i e s , i s unl i ke l y t o be a c c e pt e d i nde f i ni t e l y . A t
s om e poi nt , pe r ha ps a f t e r t he c r i s i s ha s f a de d, na t i ona l gove r nm e nt s w i l l
w a nt t o r e a s s e r t t he i r a ut onom y . D i s c i pl i ne s houl d be i m pos e d by m a r ke t s ,
not by B r us s e l s . T hi s m e a ns t ha t gove r nm e nt s s houl d be a l l ow e d t o go
bus t w h e n t he y m a ke a m e s s of t he i r e c onom i c pol i c i e s . I n s h or t , t he no-
ba i l – out r ul e ne e ds t o be r e s t or e d. D oi ng s o r e qui r e s a e ur o z one s t a bl e
e nough t o w i t hs t a nd t he s hoc k of a de f a ul t . T he a ns w e r , t he c onc l us i on
a r gue s , i s a t a r ge t e d dos e of A m e r i c a n- s t yl e f i s c a l f e de r a l i s m i n w hi c h
s om e of t he r i s ks a r e s ha r e d. T hi s i nvol ve s s e ve r a l r e f or m s , f r om
c om pl e t i ng t he e m br yoni c ba nk i ng uni on t o i s s ui ng j oi nt de bt a nd pe r ha ps
s e t t i ng up a m o de s t c e nt r a l budge t t ha t c a n he l p s t a bi l i s e e c onom i e s . F or
t he f or e s e e a bl e f ut ur e , t he E U ’ s c r i s i s of l e gi t i m a c y c a n be a ddr e s s e d onl y
by e nha nc i ng t he r ol e of na t i ona l pa r l i a m e nt s .
N one of t hi s w i l l be e a s y , but a l l of i t w i l l be ne c e s s a r y i f t he pr oj e c t of
E ur ope a n i nt e gr a t i on i s not j us t t o s ur vi ve but t o t hr i ve w i t h t he c ons e nt of
i t s c i t i z e ns .
J ohn P e e t a nd A nt on L a G ua r di a
M ar c h 2014

1 “ I f t h e e u r o f a i l s , E u r o p e f a i l s ”
IN THE SPRING AND SUMMER OF 201 2 t h e r e w a s a f a d i n of f e r i ng a dvi c e on
how t o br e a k up t he e ur o. M or e t ha n t w o ye a r s a f t e r t he s t a r t of t he G r e e k
de bt c r i s i s , t he e xpe r i m e nt of t he s i ngl e E ur ope a n c ur r e nc y s e e m e d t o be
c l os e t o f a i l ur e . S uc c e s s i ve ba i l – out s , c r us hi ng a us t e r i t y a nd i nnum e r a bl e
e m e r ge nc y s um m i t s t ha t pr oduc e d a t be s t a ha l f – he a r t e d r e s pons e w e r e
s t oki ng r e s e nt m e nt a m ong c r e di t or a nd de bt or c ount r i e s a l i ke . A nd s i nc e
na t i ona l l e a de r s s e e m e d e i t he r unw i l l i ng or una bl e t o w e l d t oge t he r a
c l os e r u ni on, t he pr e s s ur e of t he e ur o c r i s i s w a s r e m or s e l e s s l y pus hi ng t he
c r a c ks a pa r t . B e t t e r , t hought s o m e , t o a t t e m pt a n or de r l y di s s o l ut i on t ha n
t o be c onf r ont e d w i t h a c ha ot i c br e a k- up.
I n M a y t he f or m e r c hi e f e c onom i s t a t D e ut s c he B a nk, T hom a s M a ye r ,
pr opos e d t he i nt r oduc t i on of a p a r a l l e l c ur r e nc y f or G r e e c e , a “ G e ur o” , t o
he l p t he c ount r y de va l ue .1 I n J ul y P ol i c y E xc ha nge , a B r i t i s h t hi nk- t a nk,
a w a r de d t he £250,000 W ol f s on P r i z e f or t he be s t pl a n t o br e a k up t he e ur o
t o R oge r B oot l e of C a pi t a l E c on om i c s ,2 a pr i va t e r e s e a r c h f i r m i n L ond on.
T he f ol l ow i ng m ont h T he E c onom i s t publ i s he d a f i c t i t i ous m e m or a ndum
t o A nge l a M e r ke l , t he G e r m a n c ha nc e l l or , s e t t i ng out t w o opt i ons f or a
br e a k- up: t he e xi t of G r e e c e a l one , a nd t he de pa r t ur e of a l a r ge r gr oup of
f i ve c ount r i e s t ha t a dde d C ypr us , S pa i n, P or t uga l a nd I r e l a nd a s w e l l . A
f oot not e r e por t e d t ha t t he e ve r – c a ut i ous M e r ke l ha d t ur ne d dow n bot h
pos s i bi l i t i e s , de e m i ng t he r i s k s t o be t oo gr e a t , a nd or de r e d t he pa pe r
s hr e dde d. “ N o one ne e d e ve r kn ow t ha t t he G e r m a n gove r nm e nt ha d be e n
w i l l i ng t o t hi nk t he unt hi nka bl e . U nl e s s , of c our s e , t he m e m o l e a ke d.”3

T he i m a gi na r y m e m o w a s c l os e r t o t he t r ut h t ha n r e a de r s m i ght ha ve
t hought . T ha t s um m e r M e r ke l di d i nde e d ponde r , a nd r e j e c t , t he i de a of
t hr ow i ng t he G r e e ks out of t he e ur o. G e r m a n, E ur ope a n a nd I M F of f i c i a l s
ha d by t he n dr a w n up de t a i l e d pl a ns t o m a na ge a br e a k- up of t he e ur o –
not t o di s s ol ve t he c ur r e nc y c om pl e t e l y but r a t he r t o t r y t o pr e s e r ve a s
m uc h of i t a s p os s i bl e i f G r e e c e ( or a not he r c ount r y) w e r e t o l e a ve . T he
pl a ns ne ve r l e a ke d, w hi c h w a s j us t a s w e l l . T he m e r e e xi s t e nc e of a
c ont i nge nc y pl a n f or “ G r e xi t ” m i ght ha ve pr ovoke d a s e l f – f ul f i l l i ng pa ni c
i n m a r ke t s . F e w ha d c onf i de nc e t ha t a ny pl a n t o ove r s e e a n or de r l y br e a k-
up w oul d w or k.
O f f i c i a l s t hought t he unt hi nka b l e on a t l e a s t t hr e e oc c a s i ons . T he f i r s t
w a s i n N ove m b e r 2011, w he n G r e e c e a nnounc e d a r e f e r e ndum on i t s
s e c ond ba i l – out pr ogr a m m e . G e r m a ny a nd F r a nc e , out r a ge d by G r e e c e ’ s
i ns ubor di na t i on, de m a nde d t ha t t he r e f e r e ndum que s t i on ha d t o be w he t he r
G r e e c e w a nt e d t o s t a y i n t he e ur o or not . F or t he f i r s t t i m e , E ur ope a n
l e a de r s w e r e ope nl y e nt e r t a i ni ng t he not i on of G r e xi t . I n t he e ve nt t he vot e
w a s a ba ndone d a f t e r t he f a l l , w i t hi n da ys , of t he pr i m e m i ni s t e r , G e or ge
P a pa ndr e ou. T he s e c ond m om e nt of pe r i l c a m e be t w e e n t he t w o G r e e k
e l e c t i ons i n M a y a nd J une of 2 012, w he n t he r i s e of r a di c a l pa r t i e s of t he
l e f t a nd t he r i gh t i nc r e a s e d t he r i s k of t he G r e e ks vot i ng t he m s e l ve s out of
t he e ur o be f or e c ool e r he a ds pr e va i l e d i n t he s e c ond ba l l ot . ( E ve n a f t e r t he
c ons e r va t i ve l e a de r , A nt oni s S a m a r a s , ha d put t oge t he r a gove r nm e nt t ha t
be l a t e dl y c om m i t t e d i t s e l f t o t he E U a dj us t m e nt pr ogr a m m e , M e r ke l
de ba t e d w e l l i nt o A ugus t ove r w he t he r t o e xpe l G r e e c e .) T he t hi r d da nge r
poi nt w a s t he t ough ne got i a t i on ove r t he ba i l – out f or C ypr u s i n M a r c h
2013. T he ne w l y e l e c t e d pr e s i de nt , N i c os A na s t a s i a de s , t hr e a t e ne d t o l e a ve
t he c ur r e nc y i f a ba i l – out m e a nt de s t r oyi ng t he i s l a nd’ s t w o l a r ge s t ba nks
a nd w i p i ng out t he i r bi g e xpa t r i a t e ( m os t l y R us s i a n) de pos i t or s . A f t e r t w o
r ounds of ugl y ne got i a t i ons A na s t a s i a de s s uc c um be d t o hi s r e s c ue r s .
T he e ur o z one w oul d ha ve be e n i l l – pr e pa r e d t o c ope w i t h G r e xi t i n l a t e
2011. J e a n- C l a u de T r i c he t , w ho pr e s i de d ove r t he E C B unt i l t he e nd of
O c t obe r 2011, w oul d not c ount e na nc e de t a i l e d doom s da y pl a nni ng. A nd
w i t hout t he c e nt r a l ba nk’ s pow e r t o c r e a t e m one y , a br e a k- up m i ght ha ve
be e n unc ont r ol l a bl e . T r i c he t ’ s s uc c e s s or , M a r i o D r a ghi , di d s e t up a c r i s i s –
m a na ge m e nt t e a m i n J a nua r y 2 012. W i t hi n a ye a r t he E C B a nd t he I M F
ha d de ve l ope d a n hour – by- hou r , da y- by- da y pl a n t o t r y t o m a na ge t he

de pa r t ur e of a e ur o- z one m e m be r . B y t he t i m e of t he ne got i a t i ons w i t h
C ypr us , a dm i t t e dl y a s m a l l e r c ount r y t ha n G r e e c e or t he ot he r r e s c ue d
e c onom i e s , t he pr os pe c t of C yp r e xi t di d not c a us e a nyw he r e ne a r t he s a m e
de gr e e of f e a r a m ong of f i c i a l s , or m a r ke t s .
O t he r s a l s o w or ke d up c ont i ng e nc y pl a ns , not l e a s t i n t he E ur ope a n
C om m i s s i on a nd t he E ur ope a n C ounc i l , t hough he r e c o- or di na t i on w a s
w e a ke r f or f e a r of di s c l os ur e . “ E ve r yt hi ng i n B r us s e l s l e a ks ,” s a ys one of
t hos e i nvol ve d. O f f i c i a l s r e c ount how on one oc c a s i on H e r m a n V a n
R om puy , pr e s i de nt of t he E ur ope a n C ounc i l , r a i s e d t he pr os pe c t of G r e xi t
w i t h J os é M a nue l B a r r os o, pr e s i de nt of t he C om m i s s i on. “ I do n’ t w a nt t o
know t h e de t a i l s . B ut I hope you a r e t a ki ng c a r e of i t ,” V a n R o m puy s a i d.
E ve n s o, hi s o w n s m a l l t e a m of e c onom i s t s a l s o qui e t l y w or ke d up
pos i t i on pa pe r s .
I t a l l m a de f or a s t r a nge da nc e i n t he da r kne s s . W i t hi n t he
C om m i s s i on, s t a f f a t t he e c onom i c s di r e c t or a t e ha d be e n e xpr e s s l y
or de r e d not t o d o a ny w or k on t he r e s pons e t o a pos s i bl e br e a k- up, e ve n
t hough a di s c r e e t gr oup of s e n i or c om m i s s i one r s a nd of f i c i a l s di d j us t
t ha t : pl a n f or a s pl i t i n t he c ur r e nc y z one . T he y ha d t w o m a i n pur pos e s :
f i r s t , t o s e t out w ha t w oul d ha ve t o be done ; a nd s e c ond, t o m a ke t he c a s e
f or w hy i t s houl d not be done . F or ot he r s i t w a s a m a t t e r of m a na gi ng a s
w e l l a s pos s i bl e . F or a l l c onc e r ne d a bi g di l e m m a w a s how m uc h t o t e l l
t he G r e e k a ut hor i t i e s a bout t he pr e pa r a t i ons f or t he i r c ount r y’ s pos s i bl e
r e t ur n t o t he dr a c hm a . T he a ns w e r w a s : ha r dl y a nyt hi ng a t a l l .
L i k e t h e g o l d s t a n d a r d , o n l y w o r s e
F i xe d e xc ha nge – r a t e s ys t e m s ha ve f a l l e n a pa r t t hr oughout hi s t or y , f r om t he
gol d s t a nda r d t o va r i ous dol l a r pe gs . B ut gi vi ng up a f i xe d pe g i s ve r y
di f f e r e nt f r om s c r a ppi ng a n e nt i r e c ur r e nc y . T hi s ha s ha ppe ne d t oo, but
us ua l l y onl y w he n pol i t i c a l uni ons ha ve br oke n a pa r t : f or i ns t a nc e , t he
br e a k- up of t he A us t r o- H unga r i a n e m pi r e , t he c ol l a ps e of t he S ovi e t U ni on
or t h e ve l ve t di v or c e be t w e e n t he C z e c h R e publ i c a nd S l ova ki a . A nd none
of t h e s e pr e c e de nt s qui t e c a pt ur e s t he s pe c i a l c i r c um s t a nc e s of t he e ur o. I t
i s a s i ngl e c ur r e nc y w i t hout a s i ngl e gove r nm e nt . I t i s m a de up of r i c h
c ount r i e s , m a ny of w hi c h ha ve bui l t up l a r ge de bt s a nd l a r ge e xt e r na l
i m ba l a nc e s , s o t he s um s a t s t a ke a r e pr opor t i ona t e l y l a r ge . A m a p of t he

w or l d s i z e d a c c or di ng t o e a c h c ount r y’ s gove r nm e nt s pe ndi ng s how s
E ur ope a s a huge , puf f e d- up ba l l of publ i c m one y .4 M or e ov e r , t he e ur o
z one i s a s ubs e t of t he E ur ope a n U ni on a nd i t s s i ngl e m a r ke t , w i t hi n w hi c h
goods , s e r vi c e s , c a pi t a l a nd pe opl e m ove m or e or l e s s f r e e l y . A s a r e s ul t ,
t he s pi l l ove r e f f e c t s on ot he r E ur ope a n c ount r i e s w oul d be t ha t m uc h
gr e a t e r .
I t ha d t a ke n ye a r s f or c ount r i e s t o pr e pa r e f or t he i nt r oduc t i on of t he
e ur o. I f a ny l e f t , t he y m i ght ha ve t o a da pt t o t he r e de nom i na t i on of a
m e m be r ’ s c ur r e nc y ove r ni ght , o r a t be s t ove r a w e e ke nd. N obody c oul d be
s ur e a bout t he c ons e que nc e s s houl d t he s uppos e dl y i r r e voc a bl e c ur r e nc y
be c om e r e voc a bl e . T he r e w e r e t w o pr e va i l i ng be l i e f s . O ne w a s t he
a m put a t i on t he o r y: s e ve r i ng a ga ngr e nous l i m b s uc h a s G r e e c e w oul d s a ve
t he r e s t of t he body . T he ot he r w a s t he dom i no t he or y: t he f a l l of one
c ount r y w oul d l e a d t o t he c ol l a ps e of one e c onom y a f t e r a no t he r . G r e xi t
m i ght t hus be f ol l ow e d by P or t e xi t , S pe xi t , I t a l e xi t a nd e ve n F r e xi t .
G i ve n s uc h unc e r t a i nt i e s , t he obj e c t i ve f or of f i c i a l s pr e pa r i ng
c ont i nge nc y pl a ns w a s c l e a r : r e ga r dl e s s of w hi c h c ount r y l e f t t he e ur o, t he
r e s t m us t be he l d t oge t he r a l m os t a t a ny c os t . T hos e i nvol ve d s pe a k onl y
i n gua r de d t e r m s a bout pr e c i s e l y w ha t t he y w oul d ha ve done . W oul d t he
de pa r t ur e of , s a y , G r e e c e ha ve r e qui r e d C ypr us t o l e a ve a s w e l l , gi ve n t he i r
c l os e i nt e r c onne c t i on? T he E C B w oul d ha ve f l oode d t he f i na nc i a l s ys t e m
w i t h l i qui di t y t o t r y t o e ns ur e t ha t c r e di t m a r ke t s di d not dr y up, a s t he y
ha d don e a f t e r t he c ol l a ps e of L e hm a n B r ot he r s , a nd t o f or e s t a l l r uns on
bot h ba nks a nd s ove r e i gns . L a r g e qua nt i t i e s of ba nknot e s w oul d ha ve be e n
m a de a va i l a bl e i n t he s out h t o r e a s s ur e a nxi ous de pos i t or s e s pe c i a l l y i f , a s
dur i ng t he C ypr us c r i s i s , ba n ks w e r e s hut dow n a nd c a pi t a l c ont r ol s
i m pos e d. T he E C B w oul d pr oba bl y ha ve e nga ge d i n unpr e c e de nt e d bond-
buyi ng t o hol d dow n t he bor r ow i ng c os t s of vul ne r a bl e c ount r i e s . L oa ns t o
c ount r i e s a l r e a dy unde r ba i l – out pr ogr a m m e s w oul d ha ve be e n i nc r e a s e d,
a nd s om e ki nd of pr e c a ut i ona r y l oa n e xt e nde d t o S pa i n a nd I t a l y .
T he I M F w oul d ha ve he l pe d G r e e c e m a na ge t he r e i nt r oduc t i on of t he
dr a c hm a . T hi s w oul d pr oba bl y ha ve r e qui r e d a t r a ns i t i on pe r i od ( pe r ha ps
a s s hor t a s one m ont h) i nvol vi n g a pa r a l l e l c ur r e nc y , or I O U s a k i n t o t he
“ pa t a c one s ” t ha t c i r c ul a t e d i n A r ge nt i na a f t e r i t l e f t i t s dol l a r pe g i n 2000,
t hough E U l a w ye r s t hought t he s e w oul d be i l l e ga l . T he E C B w oul d ha ve

de a l t w i t h t he t e c hni c a l i t i e s of a da pt i ng E ur ope a n e l e c t r oni c pa ym e nt
s ys t e m s t o t he de pa r t ur e of a m e m be r . T he C om m i s s i on w oul d i nt r oduc e
gui de l i ne s f or c a pi t a l c ont r ol s .
G r e e c e m i ght ha ve ne e de d a ddi t i ona l a i d t o m a na ge t he uphe a va l , not
l e a s t t o buy e s s e nt i a l goods . I n w ha t r e m a i ne d of t he e ur o z one t he r e
w oul d ha ve be e n di f f i c ul t de c i s i ons t o t a ke ove r t he a l l oc a t i o n of l os s e s
a r i s i ng w i t hi n t he E ur os ys t e m of c e nt r a l ba nks . N a t i ona l gove r nm e nt s
w oul d ha ve t o de c i de w ho s houl d be c om pe ns a t e d f or l os s e s i n c a s e of
de f a ul t a nd t he i ne vi t a bl e ba nkr upt c i e s c a us e d by t he a br upt m i s m a t c h
be t w e e n a s s e t s a nd l i a bi l i t i e s a s t he va l ue s of c ur r e nc i e s s hi f t e d. T he y
m i ght a l s o ha ve i nc r e a s e d de po s i t gua r a nt e e s , a l t hough i n s om e c a s e s t ha t
m i ght ha ve done m or e ha r m t ha n good i f t he a ddi t i on a l l i a bi l i t y
e nda nge r e d pub l i c f i na nc e s i n w e a ke r c ount r i e s – a s i t ha d done i n I r e l a nd
i n 2008.
P e r ha ps , t hought s om e , t he r e s houl d be a E ur ope – w i de de pos i t
gua r a nt e e . I nde e d, m a ny t hought t he r e w oul d ha ve t o be a dr a m a t i c
pol i t i c a l m ove t ow a r ds gr e a t e r i nt e gr a t i on. N obody qui t e kne w w ha t f or m
t hi s m i ght t a ke , but i t w oul d ha ve ha d t o s i gna l a n uns ha ke a bl e
c om m i t m e nt t o s t a y t oge t he r . W i t hout t he i nf ur i a t i ng G r e e ks , gr e a t e r
i nt e gr a t i on m i g ht e ve n a ppe a r m or e f e a s i bl e . I nde e d, i t w a s s uc h a
pr os pe c t t ha t c onvi nc e d s om e s e ni or E U of f i c i a l s t ha t i t w oul d be a good
i de a t o l e t t he G r e e ks go a f t e r a l l : not be c a us e c ont a gi on c oul d be
c ont a i ne d, a s t he B unde s ba nk w oul d s om e t i m e s c l a i m , but pr e c i s e l y
be c a us e i t c oul d not . G r e xi t w oul d be s o a w f ul t ha t i t w oul d f or c e
gove r nm e nt s t o m a ke a l e a p i nt o f e de r a l i s m .
S a f e , f o r n o w
A l l t he s e c ons i de r a t i ons , a nd m or e , w e r e on M e r ke l ’ s m i nd i n t he s um m e r
of 2 012 w he n s he de c i de d i ns t e a d t o ke e p t he G r e e ks i n. B e yond t he
f i na nc i a l pr i c e , G e r m a ny c oul d not r i s k t he pol i t i c a l bl a m e f or br e a ki ng up
t he c ur r e nc y a nd, pot e nt i a l l y , t he E ur ope a n pr oj e c t i t s e l f . A s s he ha d
r e pe a t e dl y de c l a r e d s i nc e t he f i r s t ba i l – out of G r e e c e i n 2010, “ i f t he e ur o
f a i l s , E ur ope f a i l s ” .
T w o ot he r e ve nt s c ha nge d t he dy na m i c s of t he c r i s i s . F i r s t , a t a s um m i t
i n J une , M e r ke l a nd ot he r l e a de r s a gr e e d t o c e nt r a l i s e f i na nc i a l

s upe r vi s i on a r ound t he E C B a nd t he n ha ve t he opt i on of r e c a pi t a l i s i ng
t r oubl e d ba nks di r e c t l y f r om t he e ur o z one ’ s r e s c ue f unds . T he m ove he l d
out t he p r om i s e , f or t he f i r s t t i m e , of a ba nki ng uni on i n w hi c h t he r i s ks of
t he f i na nc i a l s e c t or w oul d be s ha r e d. T he a i m w a s t o br e a k t he doom – l oop
be t w e e n w e a k ba nks a nd w e a k gove r nm e nt s t ha t t hr e a t e ne d t o de s t r oy
bot h, e s pe c i a l l y i n S pa i n. T he s e c ond, e ve n m or e i m por t a nt , de ve l opm e nt
t ha t s um m e r w a s D r a ghi ’ s de c l a r e d r e a di ne s s t o i nt e r ve ne i n bond m a r ke t s
w i t hout pr e – s e t l i m i t s , on c ondi t i on t ha t t r oubl e d c ount r i e s s ought a e ur o-
z one ba i l – out a nd a dj us t m e nt p r ogr a m m e . H e t hus s ha r pl y r a i s e d t he c os t
of be t t i ng a ga i ns t t he e ur o – t o t he poi nt t ha t , a t t he t i m e of w r i t i ng i n
M a r c h 2014, D r a ghi ’ s gr e a t bl uf f ha s ye t t o be c a l l e d.
T he e ur o ha s be e n s a ve d, a t l e a s t f or a w hi l e . B ut e ve n a s e c onom i c
out put b e gi ns s l ow l y t o r e c ove r , t he e ur o z one r e m a i ns vul ne r a bl e a nd t he
w i de r E ur ope a n pr oj e c t r e m a i ns unde r a c ut e s t r a i n. A s T he E c onom i s t ’ s
i m a gi na r y m e m o t o M e r ke l not e d, t he c ont i nge nc y pl a ns f or t h e de m i s e of
t he e ur o w e r e ne ve r s hr e dde d; t he y w e r e m e r e l y f i l e d a w a y . A s T he
E c onom i s t ’ s i m a gi na r y m e m o t o M e r ke l not e d ( s e e c ove r s t or y he a dl i ne d
“ T e m pt e d, A nge l a ? ” i n t he i s s u e of A ugus t 11t h–17t h i n A ppe ndi x 4 ) , t he
c ont i nge nc y pl a ns f or t he de m i s e of t he e ur o w e r e ne ve r s hr e dde d; t he y
w e r e m e r e l y f i l e d a w a y .

2 F r o m t h e o r i g i n s t o M a a s t r i c h t
THE EUROPEAN PROJECT w a s a c ons e que nc e of t he s e c ond w or l d w a r a nd
t he c ol d w a r . H o w t o t a m e t he G e r m a n pr obl e m t ha t ha d l e d t o t w o w or l d
w a r s ? H ow t o ha r ne s s i t s e c onom i c pow e r t o r e bui l d E ur ope ? A nd how t o
r e c ons t i t ut e t he G e r m a n a r m y t o he l p f e nd of f t he S ovi e t t hr e a t ? T he
a ns w e r t o t he s e c onundr um s w a s t o f us e t he G e r m a n e c onom y w i t hi n a
c om m on E ur op e a n s ys t e m , a nd t o e m be d i t s a r m e d f or c e s w i t hi n a
t r a ns a t l a nt i c m i l i t a r y a l l i a nc e .
A l r e a dy i n 1946, j us t a ye a r a f t e r t he w a r ha d e nde d, C hur c hi l l c a l l e d
i n h i s Z ur i c h s pe e c h f or t he c r e a t i on of a “ ki nd of U ni t e d S t a t e s of
E ur ope ” , t o be bui l t on t he ba s i s of a pa r t ne r s hi p be t w e e n F r a nc e a nd
G e r m a ny:1
A t pr e s e nt t he r e i s a br e at hi ng- s pac e . T he c annon hav e c e as e d f i r i ng.
T he f i ght i ng has s t oppe d; but t he dange r s hav e not s t oppe d. I f w e ar e t o
f or m t he U ni t e d St at e s of E ur ope or w hat e v e r nam e or f or m i t m ay t ak e ,
w e m us t be gi n now .
F our ye a r s l a t e r , w i t h a s t r ong nudge f r om t he U ni t e d S t a t e s , t he
F r e nc h f or e i gn m i ni s t e r , R obe r t S c hum a n, pr oduc e d a pl a n t o i nt e gr a t e t he
c oa l a nd s t e e l i n dus t r i e s of F r a nc e , G e r m a ny a nd a nyone e l s e w ho w oul d
w a nt t o j oi n t he pr oj e c t . T hi s l e d di r e c t l y t o t he c r e a t i on of t he E ur ope a n
C oa l a nd S t e e l C om m uni t y ( E C S C ) i n 1951.2

T he s ol i dar i t y i n pr oduc t i on t hus e s t abl i s he d w i l l m ak e i t pl ai n t hat any
w ar be t w e e n F r anc e and G e r m any be c om e s not m e r e l y unt hi nk abl e , but
m at e r i al l y i m pos s i bl e . T he s e t t i ng up of t hi s pow e r f ul pr oduc t i v e uni t ,
ope n t o al l c ount r i e s w i l l i ng t o t ak e par t and bound ul t i m at e l y t o
pr ov i de al l t he m e m be r c ount r i e s w i t h t he bas i c e l e m e nt s of i ndus t r i al
pr oduc t i on on t he s am e t e r m s , w i l l l ay a t r ue f oundat i on f or t he i r
e c onom i c uni f i c at i on.
T hi s w a s t he ge r m of t he i de a of E ur ope a n e c onom i c i nt e gr a t i on.
T oda y t h e a nni v e r s a r y of t he s p e e c h ( M a y 9t h) i s c e l e br a t e d a s a hol i da y
by t he E ur ope a n i ns t i t ut i ons ( know n a s S c hum a n D a y) . T he E C S C
e nc om pa s s e d no t onl y F r a nc e a nd G e r m a ny , but a l s o I t a l y a nd t he t hr e e
B e ne l ux c ount r i e s , B e l gi um , t he N e t he r l a nds a nd L uxe m bour g. J e a n
M onne t , a F r e nc h c i vi l s e r va nt a nd s c i on of a c ogna c – t r a di ng f a m i l y , w ho
w a s i n m a ny w a ys t he é m i ne nc e gr i s e be h i nd t he e nt i r e E ur ope a n pr oj e c t ,
a c t e d a s t he f i r s t pr e s i de nt of i t s hi gh a ut hor i t y .3
S c hum a n a nd M onne t f ol l ow e d t he s uc c e s s f ul e s t a bl i s hm e nt of t he
E C S C w i t h a n a t t e m pt t o s e t up a pa n- E ur ope a n a r m y , t h e E ur ope a n
D e f e nc e C om m uni t y . B ut t hi s w a s a s t e p t oo f a r f or F r a nc e . T he pl a n w a s
bl oc ke d by a vot e i n t he F r e nc h N a t i ona l A s s e m bl y i n A u gus t 1954.
H e nc e f or t h N A T O w oul d pr ovi de t he ne c e s s a r y s e c ur i t y um br e l l a , w hi l e
E ur ope a n i nt e gr a t i on w oul d f oc us on e c onom i c m a t t e r s .
T he M e s s i na c onf e r e nc e of 1955 pr e pa r e d t he gr ound f or t he s i gni ng i n
1957 of t he T r e a t y of R om e , unde r w hi c h t he s i x E ur ope a n c ount r i e s t ha t
ha d j oi ne d t he E C S C e s t a bl i s he d a E ur ope a n E c onom i c C om m uni t y
( E E C ) , w hi c h pr oc l a i m e d t he obj e c t i ve of a n “ e ve r c l os e r uni on” . T he
t r e a t y e s t a bl i s he d a c us t om s uni on a nd e nvi s a ge d t he pr ogr e s s i ve c r e a t i on
of a l a r ge uni f i e d e c onom i c a r e a ba s e d on t he “ f our f r e e dom s ” of
m ove m e nt – of pe opl e , s e r vi c e s , goods a nd c a pi t a l . T he E E C i s t he di r e c t
f or e r unne r of t oda y’ s E ur ope a n U ni on.
D e s pi t e C hur c hi l l ’ s r i ngi ng c a l l i n 1946, t he U K , a l w a ys a s c e pt i c
a bout E ur ope a n pol i t i c a l i nt e gr a t i on, ha d s t ood a s i de f r om t he pr oc e s s .
I nde e d, C hur c hi l l hi m s e l f w a s c l e a r t ha t t he U K w oul d e nc our a ge but not
j oi n E ur ope a n i nt e gr a t i on. T he B r i t i s h L a bour gove r nm e nt r e f u s e d t o s i gn
up t o S c hum a n’ s pl a n, w i t h t he t he n hom e s e c r e t a r y ( a nd gr a ndf a t he r t o a
l a t e r E u r ope a n c om m i s s i one r , P e t e r M a nde l s on) , H e r be r t M or r i s on,

de c l a r i ng bl unt l y t ha t “ i t ’ s no good: t he D ur ha m m i ne r s w on’ t w e a r i t ” .4 A
l a t e r T o r y gove r nm e nt s e nt onl y a j uni or of f i c i a l t o M e s s i na , w i t h c l e a r
i ns t r uc t i ons not t o s i gn up t o a nyt hi ng. Y e t by 1961, onl y f our ye a r s a f t e r
t he T r e a t y of R om e , t he M a c m i l l a n gove r nm e nt l odge d a n a ppl i c a t i on f or
m e m be r s hi p, on l y t o s e e i t bl oc ke d by C ha r l e s de G a ul l e ’ s ve t o i n J a nua r y
1963.
C u r r e n c y r o o t s
T he not i on of a s i ngl e c ur r e nc y w a s pr e s e nt a t t he ve r y c r e a t i on of t he
E ur ope a n pr oj e c t . J a c que s R ue f f , a F r e nc h e c onom i s t , w r ot e i n t he 1950s
t ha t “ E u r ope w i l l be m a de t hr ough t he c ur r e nc y , or i t w i l l not be m a de ” .5
T he i de a of a c om m on c ur r e nc y ha s e ve n e a r l i e r r oot s . V a r i ou s e xc ha nge –
r a t e r e gi m e s e m e r ge d i n 19t h- c e nt ur y E ur ope , i nc l udi ng t he Z ol l ve r e i n
( c us t om s uni on) a nd t he gol d s t a nda r d. T he L a t i n M one t a r y U ni on, s e t up
i n 1866, e m br a c e d a pa r t i c ul a r l y unl i ke l y s oundi ng gr oup: F r a nc e , I t a l y ,
B e l gi um , S w i t z e r l a nd, S pa i n, G r e e c e , R om a ni a a nd B ul ga r i a ( e ve n m or e
bi z a r r e l y , V e ne z ue l a l a t e r j oi ne d i t ) . W he n i t s t a r t e d W a l t e r B a ge hot , e di t or
of T he E c onom i s t , de l i ve r e d a w a r ni ng t ha t ha s a c ur i ous e c ho t oda y:6
I f w e do not hi ng, w hat t he n? W hy , w e s hal l be l e f t out i n t he c ol d …
B e f or e l ong, al l E ur ope , s av e E ngl and, w i l l hav e one m one y , and
E ngl and be l e f t s t andi ng w i t h anot he r m one y .
I n t he e ve nt , t he L a t i n M one t a r y U ni on f e l l a pa r t w he n i t w a s hi t by t he
di s a s t e r of t he f i r s t w or l d w a r .
T he 193 0s w a s a not he r pe r i od of c ur r e nc y i ns t a bi l i t y i n E ur ope – a nd
t he w or l d. T he U K a nd t he S c a ndi na vi a n c ount r i e s a l l c hos e t o do t he
unt hi nka bl e i n 1931 by l e a vi ng t he gol d s t a nda r d a nd de va l u i ng. A r i va l
“ gol d b l oc k” l e d by F r a nc e a nd i nc l udi ng I t a l y , t he N e t he r l a nds a nd
S w i t z e r l a nd, c hos e t o s t a y on t he gol d s t a nda r d unt i l 1935–36. A s N i c hol a s
C r a f t s s how e d i n a 2013 pa pe r f or C ha t ha m H ous e , t he e a r l y l e a ve r s di d
m uc h be t t e r i n t e r m s of G D P a nd e m pl oym e nt t ha n t he s t a ye r s – a nd
F r a nc e , w hi c h s uf f e r e d a l ot f r o m c l i ngi ng s o l ong t o gol d, pl a ye d a r ol e
e qui va l e nt t o t oda y’ s G e r m a ny by hoa r di ng t he s t uf f a nd a l s o i ns i s t i ng on
r unni ng l a r ge c ur r e nt – a c c ount s ur pl us e s .7

A l t hough t he de s i r e f or c ur r e nc y s t a bi l i t y c a r r i e d t hr ough i nt o t he e a r l y
ye a r s of t he E u r ope a n pr oj e c t , t he gl oba l s ys t e m of f i xe d e xc ha nge r a t e s
l i nke d t o t he dol l a r ( a nd t hus t o gol d) s e t up a f t e r t he 1 944 B r e t t on W oods
c onf e r e nc e t ha t e s t a bl i s he d t he I nt e r na t i ona l M one t a r y F und ( I M F ) a nd t he
W or l d B a nk s e e m e d s uf f i c i e nt f or m os t c ount r i e s . B ut ove r t i m e , a nd
e s pe c i a l l y i n F r a nc e , t he pe r c e p t i on w a s gr ow i ng t ha t t hi s s ys t e m ga ve t he
A m e r i c a ns s om e s or t of e xor bi t a nt pr i vi l e ge . T hi s w a s one r e a s on w hy t he
E ur ope a n C om m i s s i on f i r s t f or m a l l y pr opos e d a s i ngl e E ur ope a n c ur r e nc y
i n 1962 . B y t he e nd of t he de c a de , t he r e va l ua t i on of G e r m a ny’ s
D e ut s c hm a r k a ga i ns t t he F r e nc h f r a nc i n 1969 c r e a t e d f r e s h t r a um a i n bot h
c ount r i e s , w hi c h t ur ne d i nt o r e ne w e d w or r i e s w he n t he U ni t e d S t a t e s
f or m a l l y a ba ndone d i t s l i nk t o gol d t w o ye a r s l a t e r .
A s t he di f f i c ul t y of l i vi ng w i t h a dom i na nt but de va l ui ng dol l a r
i nc r e a s e d, W i l l y B r a ndt , t he n G e r m a n c ha nc e l l or , r e vi ve d pl a ns f or a
c ur r e nc y uni on i n E ur ope . H i s pl a n w a s t a ke n up i n t he 19 71 W e r ne r
r e por t , n a m e d a f t e r a L uxe m bour gi s h pr i m e m i ni s t e r , w hi c h a r gue d f or t he
a dopt i on of a s i n gl e c ur r e nc y by 1980. T he r e por t w a s e ndor s e d i n 1972 by
a l l E ur ope a n he a ds of gove r nm e nt , i nc l udi ng t hos e f r om t he t hr e e
c ount r i e s t ha t pl a nne d t o j oi n t he c l ub i n 1973: D e nm a r k, I r e l a nd a nd t he
U K . I nde e d, a t a s um m i t m e e t i ng of he a ds of gove r nm e nt i n P a r i s i n
D e c e m be r 1972 , a l l ni ne na t i ona l l e a de r s , i nc l udi ng t he U K ’ s E dw a r d
H e a t h, s i gne d u p bl i t he l y not o nl y t o m one t a r y uni on but a l s o t o pol i t i c a l
uni on by 1980. A l a s t – m i nut e a t t e m pt by t he D a ni s h pr i m e m i ni s t e r t o a s k
hi s c ol l e a gue s e xa c t l y w ha t w a s m e a nt by pol i t i c a l uni on w a s i gnor e d by
t he F r e nc h pr e s i de nt , G e or ge s P om pi dou, w ho w a s i n t he c ha i r .8
I t w a s t he f i na l c ol l a ps e of B r e t t on W oods , f ol l ow e d by t h e A r a b-
I s r a e l i w a r a nd o i l s hoc k a nd t h e n by t he gl oba l r e c e s s i on of 1974–75, t ha t
ups e t m os t of t he s e a m bi t i ous pl a ns . Y e t by t he n W e s t G e r m a ny , a l w a ys on
t he l ook- out f or gr e a t e r c ur r e n c y s t a bi l i t y , ha d a l r e a dy s e t u p a s ys t e m
l i nki ng m os t of E ur ope ’ s c ur r e nc i e s t o t he D e ut s c hm a r k, s w i f t l y dubbe d
t he “ s na ke i n t he t unne l ” . T he i de a w a s t o s e t l i m i t s t o bi l a t e r a l c ur r e nc y
f l uc t ua t i ons , e nf or c e d by c e nt r a l – ba nk i nt e r ve nt i on. H ow e ve r , i t t ur ne d out
t ha t t he s na ke h a d onl y a f i t f ul a nd uns a t i s f a c t or y l i f e . T he U K s i gne d up
i n m i d- 1972, onl y t o be f or c e d out by t he f i na nc i a l m a r ke t s s i x w e e ks l a t e r .

B ot h F r a nc e a nd I t a l y j oi ne d a n d l e f t t he s na ke t w i c e . D e va l ua t i ons w i t hi n
t he s ys t e m w e r e di s t r e s s i ngl y f r e que nt .
B y 1978 t he r e w a s s t i l l no s i gn of a ge ne r a l r e t ur n t o t he B r e t t on
W oods s ys t e m of f i xe d e xc ha nge r a t e s . S o E ur ope ’ s pol i t i c a l l e a de r s c a m e
up w i t h t he i de a of c r e a t i ng a gr a nde r ve r s i on of t he s na ke i n t he f or m of a
E ur ope a n M one t a r y S ys t e m ( E M S ) . T he E M S w a s m a i nl y t he br a i nc hi l d
of t he F r e nc h pr e s i de nt , V a l é r y G i s c a r d d’ E s t a i ng, a nd t he G e r m a n
c ha nc e l l or , H e l m ut S c hm i dt , a l t hough t he pr e s i de nt of t he E ur ope a n
C om m i s s i on, R oy J e nki ns , a c t e d a s m i dw i f e . I n M a r c h 1979, t he E M S
c a m e i n t o be i ng. I t s m a i n pr ovi s i on w a s a n e xc ha nge – r a t e m e c ha ni s m t ha t
l i m i t e d E ur ope a n c ur r e nc y f l uc t ua t i ons t o 2¼% e i t he r s i de of a c e nt r a l r a t e
( or t o 6% f or t hos e w i t h w i de r ba nds ) . A l l ni ne m e m be r s of t h e E ur ope a n
C om m uni t y j oi n e d t he s ys t e m – e xc e pt , a s s o of t e n, t he U K ( t hi s m e a nt ,
i nc i de nt a l l y , t ha t t he E M S br oke up one of E ur ope ’ s f e w e xi s t i ng m one t a r y
uni ons , t ha t be t w e e n t he U K a nd I r e l a nd) .
Y e t f or a l l i t s a m bi t i ons , t he E M S pr ove d onl y a l i t t l e m or e pe r m a ne nt
a nd s ol i d t ha n t he s na ke . I t a l y w a s a t be s t a f i t f ul a nd w obb l y m e m be r .
A nd t he e l e c t i on i n 1981 of F r a nç oi s M i t t e r r a nd a s F r a nc e ’ s f i r s t S oc i a l i s t
pr e s i de nt of t he F i f t h R e publ i c l e d t o r e pe a t e d de va l ua t i ons of t he f r a nc –
unt i l t he pr e s i de nt , unde r t he gui da nc e of hi s ne w f i na nc e m i ni s t e r ,
J a c que s D e l or s , a nd hi s m os t s e ni or t r e a s ur y of f i c i a l , J e a n- C l a ude T r i c he t ,
a dopt e d a ne w pol i c y of l e f r anc f or t . W he n a ye a r or t w o l a t e r D e l or s
a r r i ve d i n B r us s e l s a s t he ne w pr e s i de nt of t he E ur ope a n C om m i s s i on, he
w a s qui c k onc e a ga i n t o dus t dow n t he ol d pl a ns f or a E ur o pe a n s i ngl e
c ur r e nc y .
E n t e r D e l o r s
T he r e s ul t w a s t he D e l or s r e por t , c om m i s s i one d by E ur ope a n l e a de r s i n
J une 1988, w hi c h a dvoc a t e d a t hr e e – s t a ge m ove t ow a r ds E ur ope a n
e c onom i c a nd m one t a r y uni on ( E M U ) . F i r s t , c om pl e t e t he s i ngl e m a r ke t ,
i nc l udi ng t he f r e e m ove m e nt of c a pi t a l . S e c ond, pr e pa r e f or t he c r e a t i on of
t he E ur ope a n C e nt r a l B a nk a nd e ns ur e e c onom i c c onve r ge nc e . T hi r d, f i x
e xc ha nge r a t e s a nd l a unc h t he e ur o, f i r s t a s a c ur r e nc y of r e c koni ng a nd
t he n a s not e s a n d c oi ns . T he D e l or s r e por t w e nt on t o f or m t he ba s i s of t he
M a a s t r i c ht t r e a t y , ne got i a t e d ov e r 18 m ont hs a nd f i na l l y a gr e e d on, w i t h

m uc h f a nf a r e , i n t he e ponym ous D ut c h c i t y i n D e c e m be r 1991. T he t r e a t y
w a s f or m a l l y s i gne d onl y i n F e br ua r y 1992. M a a s t r i c h t l a i d t he
f ounda t i ons f or a ne w E C B a nd a s i ngl e E ur ope a n c ur r e nc y , t o be br ought
i n e i t he r i n 1997 or ( a t t he l a t e s t ) 1999. I t a l s o pr om i s e d t o m a ke pr ogr e s s
t ow a r ds t he pa r a l l e l obj e c t i ve of pol i t i c a l uni on; a nd i t s ym bol i c a l l y
r e na m e d t he E ur ope a n C om m uni t y t he E ur ope a n U ni on.
T he ne w t r e a t y r e f l e c t e d a bove a l l t he c ha nge d pol i t i c a l s i t u a t i on i n
E ur ope a f t e r t he f a l l of t he B e r l i n W a l l i n N ove m be r 1989 a nd t he
s ubs e que nt c ol l a ps e of t he S ovi e t e m pi r e . M i t t e r r a nd, i n pa r t i c ul a r , w a s
m i nde d t o a c c e pt G e r m a n uni f i c a t i on a f t e r t he f a l l of t he w a l l onl y i f
F r a nc e c oul d s e c ur e s om e c ont r ol of t he D e ut s c hm a r k, w hi c h he f e a r e d
w oul d o t he r w i s e be c om e E ur ope ’ s de f a c t o c ur r e nc y . I n e f f e c t , he ha d no
w i s h t o r e pl a c e t he dom i na nc e of t he dol l a r w i t h t he dom i na nc e of t he
D e ut s c hm a r k. H e nc e t he unde r l yi ng F r a nc o- G e r m a n de a l a t M a a s t r i c ht .
T he F r e nc h ha d l ong f a vour e d a ne w s i ngl e c ur r e nc y , ove r w hi c h t he y
hope d ( v a i nl y , a s i t t ur ne d out ) t o e xe r t gr e a t e r i nf l ue nc e , i n l a r ge pa r t t o
of f s e t t h e gr ow i ng m i ght of a ne w l y pow e r f ul uni t e d G e r m a ny . I n hi s t ur n,
t he G e r m a n c ha nc e l l or , H e l m ut K ohl , a c c e pt e d t he i de a of gi vi ng up t he
D e ut s c hm a r k, w hi c h m a ny G e r m a n vot e r s a s w e l l a s t he B unde s ba nk w e r e
a ga i ns t , a s a pr i c e f or uni f i c a t i on a nd a s a gi a nt s t e p t ow a r ds bui l di ng a
pol i t i c a l uni on i n E ur ope . O t he r c ount r i e s s i gne d up t o t hi s w i t h m or e or
l e s s e nt h us i a s m . A s us ua l , t he B r i t i s h c onc e r n w a s m a i nl y t o be a l l ow e d t o
opt out i f t he y w a nt e d, a n obj e c t i ve t ha t w a s e a s i l y s e c ur e d by J ohn M a j or ,
t he pr i m e m i ni s t e r , w ho t ol d t he pr e s s t ha t t he r e s ul t w a s “ ga m e , s e t a nd
m a t c h” t o t he U K .9
B e s i de s a ge ne r a l ( e s pe c i a l l y G e r m a n) de s i r e f or c ur r e nc y s t a bi l i t y a nd
a w i s h t o c ont a i n t he pow e r of a uni t e d G e r m a ny , t w o ot he r f or c e s w e r e
i m por t a nt i n dr i vi ng E ur ope a l ong t he r oa d t ow a r ds M a a s t r i c ht a nd t he
de c i s i on t o a dopt a s i ngl e c ur r e nc y . O ne w a s t he or e t i c a l : t he l i t e r a t ur e on
s ha r e d c ur r e nc i e s t ha t be ga n w i t h R obe r t M unde l l ’ s 1961 a r t i c l e out l i ni ng
a t h e or y of “ opt i m um c ur r e nc y a r e a s ” . M unde l l , a C a na di a n e c onom i c s
pr of e s s or , pos i t e d t ha t s ubs t a nt i a l w e l f a r e ga i ns w e r e t o be ha d i f a gr oup
of c o unt r i e s s ha r e d a c ur r e nc y – be c a us e of m or e t r a ns pa r e nt p r i c e s , l ow e r
t r a ns a c t i on c os t s , e nha nc e d c om pe t i t i on a nd gr e a t e r e c onom i e s of s c a l e f or
bus i ne s s e s a nd i nve s t or s . B ut t h e s e ga i ns ne e de d t o be w e i ghe d a ga i ns t t he

pos s i bl e c os t s f r om l os i ng bot h m one t a r y a nd e x c ha nge – r a t e
i nde pe nde nc e .1 0
S uc h c os t s , a c c or di ng t o opt i m a l c ur r e nc y- a r e a t he or y , r i s ke d be i ng
e s pe c i a l l y hi gh i f t he c ount r i e s c onc e r ne d s uf f e r e d f r om i nt e r na l l a bour – or
pr oduc t – m a r ke t r i gi di t i e s , ha d ve r y di f f e r e nt e c onom i c s t r uc t ur e s or w e r e
l i ke l y t o be s ub j e c t t o a s ym m e t r i c s hoc ks . T he t he or y w e nt o n t o l ook a t
how gr oups of c ount r i e s t ha t di d not m e e t t he s e c ondi t i on s c oul d be
c ha nge d t o m a ke t he m m or e s ui t a bl e . T he obvi ous r e m e di e s w e r e m or e
f l e xi bi l i t y , not a b l y i n l a bour a nd pr oduc t m a r ke t s ; gr e a t e r l a bour m obi l i t y ,
s o t ha t w or ke r s w ho l os t j obs i n one c ount r y c oul d m ove f r e e l y t o
c ount r i e s w i t h m or e j ob oppor t uni t i e s ; a nd a s ubs t a nt i a l c e nt r a l budge t
t ha t c oul d t r a ns f e r r e s our c e s t o c ount r i e s t ha t got i nt o t r oubl e . T he 1977
M a c D ouga l l r e por t ha d a r gue d t ha t , i n t he e a r l y s t a ge s of a E ur ope a n
f e de r a l u ni on, a c e nt r a l budge t w oul d ha ve t o be a t l e a s t 5–7% of E ur ope –
w i de G D P , e xc l udi ng de f e nc e ( t ha t i s , 5–7 t i m e s t he s i z e of t he e xi s t i ng
E ur ope a n budge t ) , i f i t w a s t o be e f f e c t i ve .1 1
T he s e c o nd f or c e dr i vi ng m one t a r y uni on w a s a m or e pr a c t i c a l one : t he
m ove t ow a r ds a f ul l s i ngl e m a r ke t t ha t w a s be i ng pus he d f or w a r d by t he
D e l or s C om m i s s i on, m os t not a bl y by t he B r i t i s h c om m i s s i one r of t he
t i m e , A r t hur C oc kf i e l d. T he S i ngl e E ur ope a n A c t , a ppr ove d a nd r a t i f i e d i n
1986–87, ha d pa ve d t he w a y f or m uc h gr e a t e r us e of qua l i f i e d- m a j or i t y
vot i ng ( t ha t i s , a s ys t e m of w e i g ht e d m a j or i t y a s oppos e d t o un a ni m i t y) on
m os t di r e c t i ve s a nd r e gul a t i ons . T hi s w a s c r uc i a l t o t he a dopt i on of t he
1992 pr ogr a m m e f or c om pl e t i ng t he s i ngl e m a r ke t . W i t h t hi s s t e p, w ha t
w a s a bout t o be c om e t he E ur ope a n U ni on a t l a s t e m br a c e d, m or e or l e s s i n
f ul l , t he f our f r e e dom s t ha t ha d s uppos e dl y unde r pi nne d t he pr oj e c t f r om
i t s v e r y be gi nni ngs : f r e e m ove m e nt of goods , s e r vi c e s , l a bour a nd c a pi t a l
( t he l a s t r e m a i ni ng c a pi t a l c ont r ol s w e r e a bol i s he d i n 1990) .1 2
T he l i nk be t w e e n t he s i ngl e m a r ke t a nd t he s i ngl e c ur r e nc y i s not
a l w a ys c l e a r , e s pe c i a l l y t o E ur os c e pt i c s , w ho t e nd t o pr e f e r t he f i r s t t o t he
s e c ond. T he r e a s on i t e xi s t s l i e s m os t l y i n t he f our t h of t he f our f r e e dom s :
m ove m e nt of c a pi t a l . I t i s be s t s um m e d up by t he not i on of t he
“ i m pos s i bl e t r i ni t y” t ha t be c a m e popul a r i n t he e c onom i c s l i t e r a t ur e i n t he
1980s : t he c om bi na t i on of f r e e m ove m e nt of c a pi t a l , w hol l y na t i ona l
m one t a r y pol i c i e s a nd i nde pe nde nt c ont r ol of e xc ha nge r a t e s w a s de c l a r e d

t o b e unw or ka bl e or e ve n i m p os s i bl e be c a us e t he t hr e e w e r e l i ke l y t o
c ont r a di c t e a c h ot he r . T he s ol ut i on, i t w a s he l d bot h i n t he l i t e r a t ur e a nd by
E ur ope ’ s pol i t i c a l l e a de r s , w a s not t o r e ve r t t o c ons t r a i nt s on c a pi t a l f l ow s ,
s t i l l l e s s t o unpi c k t he s i ngl e m a r ke t , but i ns t e a d t o pr e s s f o r w a r d t o a
s i ngl e c ur r e nc y .
Y e t M unde l l ’ s w or k a l s o s how e d qui t e c l e a r l y t ha t , out s i de a l i m i t e d
c e nt r a l gr oup, E ur ope w a s a l ong w a y f r om be i ng a n opt i m a l c ur r e nc y
a r e a . L a bour a nd pr oduc t m a r ke t s w e r e i nf l e xi bl e a nd ove r r e gul a t e d.
W or ke r s ’ m obi l i t y w a s l i m i t e d, not j us t f or obvi ous l i ngui s t i c a nd c ul t ur a l
r e a s ons be t w e e n c ount r i e s but e ve n w i t hi n t he m . A s ym m e t r i c s hoc ks , f a r
f r om be i ng r a r e , w e r e w or r yi ngl y c om m on: G e r m a n uni f i c a t i o n w a s i t s e l f
a n e xa m pl e of one , a s w a s t he c ol l a ps e of F i nl a nd’ s t r a de w i t h R us s i a i n
1990 a nd t he b ur s t i ng of va r i ous pr ope r t y bubbl e s i n t he 1980s . A nd
c ount r i e s ’ e c o nom i e s va r i e d w i de l y: G e r m a ny w a s s t r ong i n
m a nuf a c t ur i ng b ut w e a k i n s e r v i c e s , w he r e a s t he U K w a s t he r e ve r s e , f or
e xa m pl e , w hi l e na t i ona l hous i ng a nd m or t ga ge m a r ke t s di f f e r e d huge l y i n
t he i r s t r uc t ur e , ope r a t i on, i m por t a nc e a nd s e ns i t i vi t y t o i nt e r e s t – r a t e
c ha nge s . T he M a a s t r i c ht ne got i a t or s w e r e w e l l a w a r e of s uc h pr obl e m s ,
a l t hough m a ny w e r e s w i f t t o poi nt out t ha t t he U ni t e d S t a t e s h a d a s i ngl e
c ur r e nc y w i t hout r e a l l y be i ng a n opt i m a l c ur r e nc y a r e a e i t he r . B ut t he r e
w e r e c r uc i a l di f f e r e nc e s be t w e e n t he A m e r i c a n s ys t e m a nd t he e ur o z one .
P e r ha ps i r oni c a l l y , i t w a s t he U K ’ s D a vi d C a m e r on, pr i m e m i ni s t e r of a
c ount r y t ha t w i l l pr oba bl y ne ve r j oi n t he s i ngl e c ur r e nc y , w ho be s t
s um m e d up t he s e de f e c t s , s pe a ki ng 12 ye a r s a f t e r t he e ur o w a s l a unc he d a t
a D a vos W or l d E c onom i c F or um . A s he t he n put i t :1 3
T he r e ar e a num be r of f e at ur e s c om m on t o al l s uc c e s s f ul c ur r e nc y
uni ons : a c e nt r al bank t hat c an c om pr e he ns i v e l y s t and be hi nd t he
c ur r e nc y and f i nanc i al s y s t e m ; t he de e pe s t pos s i bl e e c onom i c
i nt e gr at i on w i t h t he f l e x i bi l i t y t o de al w i t h e c onom i c s hoc k s ; and a
s y s t e m of f i s c al t r ans f e r s and c ol l e c t i v e de bt i s s uanc e t hat c an de al w i t h
t he t e ns i ons and i m bal anc e s be t w e e n di f f e r e nt c ount r i e s and r e gi ons
w i t hi n t he uni on. C ur r e nt l y i t ’ s not t hat t he e ur o z one doe s n’ t hav e al l of
t he s e ; i t ’ s t hat i t doe s n’ t r e al l y hav e any of t he s e .

I ns t e a d of c r e a t i ng s uc h s t r uc t ur e s , t he c r e a t or s of t he e ur o l i m i t e d
t he m s e l ve s t o de vi s i ng a s e t of “ c onve r ge nc e c r i t e r i a ” t ha t na t i ona l
gove r nm e nt s w oul d be r e qui r e d t o m e e t i n or de r t o qua l i f y f or
m e m be r s hi p of t he E ur ope a n s i ngl e c ur r e nc y . Y e t , a s m a ny a r g ue d e ve n a t
t he t i m e , t he y qui t e i r r e s pons i bl y c hos e one s t ha t ha d l i t t l e t o do w i t h
t r a ns f or m i ng E ur ope i nt o s om e t hi ng t ha t m i ght ha ve m or e c l os e l y
r e s e m bl e d a n opt i m a l c ur r e nc y a r e a .
T he r i gh t de ba t e a t M a a s t r i c ht w oul d ha ve be e n a bout how be s t t o pus h
f or w a r d s t r uc t ur a l r e f or m s t o l a bour a nd pr oduc t m a r ke t s , how t o i m pr ove
c ount r i e s ’ c om pe t i t i ve ne s s a nd c ur r e nt – a c c ount pos i t i ons , how t o c r e a t e a
ba c ks t op s ys t e m of t r a ns f e r s or i ns ur a nc e a nd how t o m a ke s ur e t ha t t he
put a t i ve E ur ope a n C e nt r a l B a n k c oul d a c t pr ope r l y a s a l e nde r of l a s t
r e s or t . P l e nt y of c om m e nt a t or s , i nc l udi ng m a ny f r om t he U ni t e d S t a t e s
a nd t he U K , m a de s uc h obs e r va t i ons . O ne e xa m pl e w a s a n a r t i c l e i n T he
E c onom i s t i n O c t obe r 1998, w hi c h c onc l ude d:1 4
T he c ur r e nt s e t – up l ook s uns at i s f ac t or y . T he E C B s houl d be r e c ogni s e d
as l e nde r of l as t r e s or t . I t c oul d al s o be gi v e n c e nt r al r e s pons i bi l i t y f or
f i nanc i al – s e c t or s upe r v i s i on.
I n t he e ve nt , t he f i ve c r i t e r i a c hos e n f or t he M a a s t r i c ht t r e a t y w e r e :
l ow i nf l a t i on a nd l ow l ong- t e r m i nt e r e s t r a t e s ; t w o ye a r s ’ m e m be r s hi p of
t he e xc h a nge – r a t e m e c ha ni s m of t he E M S ; a nd, m os t c ont r o ve r s i a l l y of
a l l , c e i l i ngs on publ i c de bt of 60% of G D P a nd on budge t de f i c i t s of 3% of
G D P . W hy w e r e t he s e l a s t t w o t e s t s c hos e n? T he l e a de r s of m or e pr ude nt
c ount r i e s ( t ha t i s , G e r m a ny a nd t he N e t he r l a nds ) a r gue d t ha t , i f t he s i ngl e
c ur r e nc y w e r e t o pa s s m us t e r w i t h s c e pt i c a l f i na nc i a l m a r ke t s a nd publ i c
opi ni on, l i m i t s w oul d ha ve t o be s e t on pot e nt i a l l y pr of l i ga t e publ i c
bor r ow e r s ( by w hi c h t he y c hi e f l y m e a nt I t a l y a nd t he M e di t e r r a ne a n
c ount r i e s ) .
B ut t he t r ut h w a s a l ot m or e pol i t i c a l . G e r m a n vot e r s w e r e s t i l l hos t i l e
t o t he i de a of gi vi ng up t he D e ut s c hm a r k. O ne r e a s on w a s a w i de s pr e a d
f e a r t ha t G e r m a ny m i ght e nd up ha vi ng t o ba i l out E ur ope ’ s m os t i nde bt e d
c ount r i e s , e s pe c i a l l y t he m os t i nde bt e d of a l l : I t a l y . T hus t he de bt a nd
de f i c i t c r i t e r i a w e r e de vi s e d not s o m uc h on t he i r e c onom i c m e r i t s , but
r a t he r i n t he e xpe c t a t i on t ha t t h e y w oul d ke e p I t a l y ( a nd pr e s u m a bl y a l s o

S pa i n, P or t uga l a nd G r e e c e ) out of t he s i ngl e c ur r e nc y , a s t he s e c ount r i e s
w e r e e xp e c t e d t o f i nd i t a l l but i m pos s i bl e t o pa s s t he t w o f i s c a l t e s t s . T he
hope , i n s hor t , w a s t ha t E M U w oul d be gi n s m oot hl y but w i t h a s m a l l c or e
gr oup, e s s e nt i a l l y t he D e ut s c hm a r k z one pl us ( a l m os t c e r t a i nl y) F r a nc e .
R e a d y , s t e a d y , g o
T w o bi g e ve nt s ove r t ur ne d t hi s t i dy pl a n. T he f i r s t , w hi c h c oi nc i de d
om i nous l y w i t h t he ne got i a t i on a nd s i gna t ur e of t he M a a s t r i c ht t r e a t y , w a s
ye t a not he r bout of f i na nc i a l – m a r ke t j i t t e r s . T hr oughout t he t r a um a of
G e r m a n uni f i c a t i on, t he E M S a nd i t s e xc ha nge – r a t e m e c ha ni s m ha d
c ont i nue d t o ope r a t e . I nde e d, t he U K c hos e t o j oi n i n m i d- 1990, a f t e r a
l ong a nd pol i t i c a l l y c ont r ove r s i a l e xpe r i m e nt by t he t he n c ha nc e l l or of t he
e xc he que r , N i ge l L a w s on, t o “ s ha dow ” t he D e ut s c hm a r k w i t hout
i nf or m i ng hi s pr i m e m i ni s t e r , M a r ga r e t T ha t c he r . T he s t r a i n of ke e pi ng up
w i t h a s t r ong D e ut s c hm a r k s o on be ga n t o t e l l , a nd i t w a s c ons i de r a bl y
i nc r e a s e d i n N ove m be r 1990 by t he ous t i ng of T ha t c he r , l a r ge l y ove r t he
i s s ue of t he U K ’ s a t t i t ude t o pl a ns f or t he ne w E ur ope a n t r e a t y t ha t l a t e r
be c a m e M a a s t r i c ht .
B ut i t w a s t he a f t e r m a t h of G e r m a n uni f i c a t i on i n t ha t s a m e m o nt h t ha t
r e a l l y got t he m a r ke t s goi ng. T hi s a s ym m e t r i c s hoc k m a y ha ve c os t W e s t
G e r m a ny a l ot of t r e a s ur e a nd r e qui r e d m a s s i ve ne w i nve s t m e nt , but i t s
e f f e c t i n t he m a r ke t pl a c e w a s t o i nc r e a s e de m a nd f or t he G e r m a n c ur r e nc y .
T ha t s e nt t he D e ut s c hm a r k s oa r i ng, hi t t i ng G e r m a n c om pe t i t i ve ne s s a t a
t i m e w he n m uc h of E ur ope w a s on t he ve r ge of r e c e s s i on or a c t ua l l y i n i t .
T he m a r ke t s be c a m e e ve n m or e j i t t e r y w he n, i n a J une 1992 r e f e r e ndum ,
t he D a ne s na r r ow l y s a i d no t o t he r e c e nt l y s i gne d M a a s t r i c ht t r e a t y . I n
e a r l y S e pt e m be r F r e nc h vot e r s s a i d ye s , but by t he t hi nne s t pos s i bl e
m a j or i t y . B y t he n t he s t r a i ns on t he U K , I t a l y a nd F r a nc e i t s e l f of
s uppor t i ng t he i r e xc ha nge r a t e s t o ke e p up w i t h t he D e ut s c hm a r k ha d
gr ow n i nt ol e r a bl e . I n a dr a m a t i c w e e k i n m i d- S e pt e m be r , f i r s t I t a l y a nd
t he n t he U K w e r e f or c e d out of t he E M S ’ s e xc ha nge – r a t e m e c ha ni s m . A nd
t he G e r m a n B unde s ba nk ha d t o i nt e r ve ne he a vi l y t o ke e p F r a nc e i n ( a t r i c k
i t r e pe a t e d i n l a t e 1993, w he n t he pe r m i s s i bl e ba nds i n t he e xc ha nge – r a t e
m e c ha ni s m w e r e w i de ne d t o 15% ) .

T hos e i nvol ve d i n w ha t t he B r i t i s h l a t e r c a m e t o c a l l “ B l a c k
W e dne s da y” dr e w ve r y di f f e r e nt c onc l us i ons f r om i t . F r a nc e be c a m e
c onvi nc e d t ha t a s i ngl e c ur r e nc y , ove r w hi c h i t s t i l l hope d t o e xe r t s om e
pol i t i c a l c ont r ol , w a s m or e e s s e nt i a l t ha n e ve r , f or w i t hout i t t he
B unde s ba nk w oul d r e m a i n pa r a m ount . T he U K c onc l ude d t ha t a c ur r e nc y
s t r a i t j a c ke t w a s a ba d i de a a nd t ha t i t c oul d ne ve r r e l y on G e r m a n s uppor t ,
s o B l a c k W e dne s da y c a m e t o be s e e n a s a not he r r e a s on t o s t a y out of a
s i ngl e c ur r e nc y , i f one e ve r c a m e i nt o be i ng ( i t i s w or t h r e c a l l i ng t ha t a
young C a m e r on w a s a pol i t i c a l a dvi s e r t o t he c ha nc e l l or of t he e xc he que r ,
N or m a n L a m on t , a t t he t i m e of B l a c k W e dne s da y) . I t a l y , S pa i n a nd ot he r
M e di t e r r a ne a n c ount r i e s dr e w a di f f e r e nt l e s s on s t i l l : t he y de c i de d t ha t ,
w hi l e a s i ngl e c ur r e nc y m i ght w e l l i m pos e pa i n on t he m , i t w oul d be be t t e r
t o do w ha t e ve r t he y c oul d t o ho p on boa r d f r om t he be gi nni ng r a t he r t ha n
r i s k f a l l i ng f ur t he r be hi nd.
H e nc e a l s o t he s e c ond bi g de ve l opm e nt i n t he 1990s : t he r e s pons e of
t he M e di t e r r a ne a n c ount r i e s , m os t of w hi c h t he G e r m a ns s t i l l w a nt e d t o
ke e p out . T he t e s t c a s e w a s I t a l y . I n t he e a r l y 1990s i t s budge t de f i c i t a nd,
e ve n m or e obvi ous l y , i t s publ i c de bt w e r e w a y a bove t he M a a s t r i c ht
t a r ge t s . Y e t t he r e w a s bound t o be s om e f l e xi bi l i t y i n t he s ys t e m , not l e a s t
be c a us e B e l gi um , w hi c h a s t he s e a t of t he E ur ope a n i ns t i t ut i o ns a nd pa r t
of t h e B e ne l ux t r i o w a s s e e n b y a l l a s a n e s s e nt i a l f ounde r m e m be r of
E M U , a l s o ha d a publ i c de bt i n e xc e s s of 100% of G D P . I n 1996 R om a no
P r odi , w ho ha d be c om e I t a l i a n pr i m e m i ni s t e r j us t ove r a ye a r e a r l i e r ,
s poke t o hi s S pa ni s h c ount e r pa r t , J os é M a r i a A z na r , a bout t he pos s i bi l i t y
of j oi nt l y s t a ndi ng a s i de f r om t he t hi r d s t a ge of E M U w he n i t c a m e . B ut
A z na r r e pl i e d t ha t he , a t l e a s t , w a s de t e r m i ne d t o j oi n f r om t he s t a r t . T ha t
dr ove P r odi not onl y t o r e j oi n t he E M S but a l s o t o r e doubl e hi s e f f or t s t o
c ut I t a l y’ s budge t de f i c i t t o be l ow 3% of G D P . G i ve n t he B e l gi a n pos i t i on,
i t w a s a l w a ys goi ng t o be ha r d t o e xc l ude I t a l y on t he gr ounds of i t s publ i c
de bt a l one . T hi s be c a m e t r ue r s t i l l w he n F r a nc e a nd t o s om e e xt e nt
G e r m a ny i t s e l f ha d t o m a s s a ge t he i r budge t num be r s t o ge t be l ow t he 3%
c e i l i ng i n 1997 a nd 1998.
A s t he l i ke l i hood t ha t I t a l y w oul d be a f ounde r m e m be r of t h e s i ngl e
c ur r e nc y be c a m e e ve r m or e obvi ous , t he G e r m a n f i na nc e m i ni s t e r , T he o
W a i ge l , s t a r t e d t o pr e s s ha r de r f or a f or m a l i s a t i on a nd t i ght e ni ng of t he
r ul e s l i m i t i ng b udge t de f i c i t s a nd de bt s a f t e r E M U ha d s t a r t e d , a s w e l l a s

be f or e . T he M a a s t r i c ht t r e a t y ha d l a i d dow n a n e xc e s s i ve de f i c i t s
pr oc e dur e , but W a i ge l f e l t t ha t i t w a s t oo f l e xi bl e . I ns t e a d, he de m a nde d a
ne w “ s t a bi l i t y pa c t ” t ha t w oul d a ut om a t i c a l l y i m pos e s w i nge i ng f i ne s on
a ny c ount r y t ha t r a n a budge t de f i c i t a bove 3% of G D P . M os t ot he r
c ount r i e s , l e d by F r a nc e , na t ur a l l y r e s i s t e d a ny a ut om a t i c s a nc t i ons .
E ve nt ua l l y W a i ge l w a s f or c e d t o gi ve gr ound: t he f i ne s w oul d be
i m pos e d onl y w i t h t he a ppr ova l of a “ qua l i f i e d m a j or i t y” of m e m be r
gove r nm e nt s ( e xc l udi ng t he m i s c r e a nt ) . W he n i n F r a nc e a ne w S oc i a l i s t
gove r nm e nt w a s f or m e d a f t e r t he pa r t y w on t he pa r l i a m e nt a r y e l e c t i on of
J une 19 97, he e ve n ha d t o c onc e de a c ha nge of na m e t o t ur n i t i nt o a
“ s t a bi l i t y a nd gr ow t h pa c t ” . I r on i c a l l y e nough, hi s ow n bos s , H e l m ut K ohl ,
l os t hi s j ob j us t ove r a ye a r l a t e r t o hi s S oc i a l D e m oc r a t i c c ha l l e nge r . T hi s
m e a nt t ha t t he t w o or i gi na l c ha m pi ons of t he e ur o – K ohl a nd M i t t e r r a nd –
ha d bot h l e f t of f i c e by t he t i m e i t a c t ua l l y be ga n ( a nd t he t w o c ount r i e s
a l s o ha d nom i na l l y c e nt r e – l e f t gove r nm e nt s i n 1999) . T he i r s uc c e s s or s a s
G e r m a n a nd F r e nc h l e a de r s , G e r ha r d S c hr öde r a nd J a c que s C hi r a c , f e l t
l e s s c om m i t t e d e i t he r t o t he e u r o i n ge ne r a l or t o t he s t a bi l i t y a nd gr ow t h
pa c t i n pa r t i c ul a r . I nde e d, t he y w e r e t o be c om e t he f i r s t t o br e a c h i t s t e r m s ,
i n l a t e 2003.
B y l a t e 1997, t h e n, i t w a s c l e a r t ha t a l l E U c ount r i e s e xc e pt D e nm a r k,
S w e de n a nd t he U K , a l l of w hi c h ha d opt e d out i n one w a y or a not he r , a nd
G r e e c e , w hi c h w a s m i l e s f r om m e e t i ng a ny of t he c r i t e r i a , w oul d j oi n t he
e ur o w he n i t be ga n l i f e i n 1999. P hys i c a l not e s a nd c oi ns f ol l o w e d onl y i n
2002, pa r t l y be c a us e of t he t i m e s a i d t o be ne e de d t o pr i nt a nd m i nt t he m
i n s u f f i c i e nt qua nt i t i e s . I n t he m e a nt i m e G r e e c e qui e t l y s l i ppe d i n t o j oi n
t he s i ng l e c ur r e nc y a t t he s t a r t of 2001, a t a t i m e w he n f e w p e opl e w e r e
l ooki ng. P e r ha ps w or r yi ngl y , t h i s e c hoe d t he s t or y of G r e e c e ’ s e nt r y i nt o
t he E E C i n 19 81. T he C om m i s s i on ha d gi ve n a ne ga t i ve opi ni on on
G r e e c e ’ s a ppl i c a t i on, but i t w a s ove r r ul e d by na t i ona l gove r nm e nt s l a r ge l y
on t he ba s i s t ha t , a s F r a nc e ’ s c l a s s i c a l l y m i nde d pr e s i de nt , V a l é r y G i s c a r d
d’ E s t a i ng, put i t , “ one doe s not s a y no t o P l a t o” .1 5 I t a l s o he l pe d t ha t
G r e e c e ’ s pr i m e m i ni s t e r i n 2001, C os t a s S i m i t i s , w a s bot h G e r m a nophi l e
a nd G e r m a n- s pe a ki ng. A f t e r G r e e c e j oi ne d, t he f un r e a l l y be ga n.

3 H o w i t a l l w o r k s
THE EUROPEAN PROJECT ( a nd t hus t he e ur o) s uf f e r s bot h f r om a l a c k of
c l a r i t y o ve r i t s pr e c i s e na t ur e a nd e nd- poi nt a nd f r om t he dul l c om pl e xi t y
of i t s i ns t i t ut i on a l s t r uc t ur e . L i ke a pa nt om i m e hor s e , i t ha s l ong ha d a
dua l c ha r a c t e r , r e f l e c t i ng a n i ni t i a l c om pr om i s e be t w e e n t hos e c ount r i e s
w a nt i ng a U ni t e d S t a t e s of E ur ope a nd t hos e pr e f e r r i ng a c l ub of na t i on-
s t a t e s . T hus i t h a s f e de r a l i s t e l e m e nt s s uc h a s t he E ur ope a n C om m i s s i on, a
( now di r e c t l y e l e c t e d) E ur ope a n P a r l i a m e nt , a E ur ope a n C our t of J us t i c e
a nd a E ur ope a n C e nt r a l B a nk. B ut i t a l s o ha s s t r ong i nt e r – go ve r nm e nt a l
bodi e s : t he C ounc i l of M i ni s t e r s , r e pr e s e nt i ng na t i ona l gove r nm e nt s , a nd
t he E ur ope a n C ounc i l of he a d s of s t a t e a nd gove r nm e nt . A n i m por t a nt
f or c e t hr oughout t he e ur o c r i s i s ha s be e n t he t e ns i on be t w e e n t hos e
pr e f e r r i ng f e de r a l a ns w e r s ( of t e n c a l l e d t he “ c om m uni t y” m e t hod) a nd
t hos e f a vour i ng i nt e r – gove r nm e nt a l s ol ut i ons ( s om e t i m e s r e f e r r e d t o a s
t he “ uni on” m e t hod) .1
A t t he he a r t of bot h t he E U a nd t he e ur o s t a nds t he E ur ope a n
C om m i s s i on, t o w hi c h e a c h o f t he c ur r e nt l y 28 na t i ona l g ove r nm e nt s
a ppoi nt s one c om m i s s i one r f or a f i ve – ye a r t e r m ( t he ne xt C om m i s s i on
t a ke s of f i c e a t t he e nd of 2014) . C om m i s s i one r s , ba s e d i n B r us s e l s , a r e
l e ga l l y r e qui r e d t o be w hol l y i nde pe nde nt , a l t hough i n pr a c t i c e t he y
us ua l l y do w ha t t he y c a n t o a dv a nc e na t i ona l i nt e r e s t s . T he “ c ol l e ge ” of 28
c om m i s s i one r s s i t s a bove a 20,000- s t r ong bur e a uc r a c y t ha t f unc t i ons a s
t he E ur ope a n U ni on’ s e xe c ut i ve br a nc h. T he C om m i s s i on i s t he gua r di a n
of t he t r e a t i e s , ha s t he ne a r – e xc l us i ve r i ght of l e gi s l a t i ve i ni t i a t i ve ,

a dm i ni s t e r s c om pe t i t i on a nd s t a t e – a i d l a w a nd c onduc t s c e r t a i n t hi r d- pa r t y
ne got i a t i ons , f or i ns t a nc e on t r a de , on be ha l f of t he E U a s a w hol e .
T he C ou nc i l of M i ni s t e r s i s t he s e ni or l e gi s l a t i ve body . I t c ons i s t s of
m i ni s t e r s f r om na t i ona l gove r nm e nt s , m e e t i ng i n di f f e r e nt f or m a t i ons
( f i na nc e or E c oF i n, a gr i c ul t ur e a nd f i s he r i e s , e nvi r onm e nt , a nd s o on) . I n
m a ny a r e a s t he C ounc i l t a ke s de c i s i ons by qua l i f i e d m a j or i t y , a s ys t e m of
w e i ght e d vot e s t ha t , unde r t he 2009 L i s bon t r e a t y , i s due t o c ha nge i n l a t e
2014 i n t o a ne w a r r a nge m e nt of a “ doubl e m a j or i t y” t ha t t a ke s gr e a t e r
a c c ount of popul a t i on s i z e . C ounc i l m e e t i ngs a r e pr e pa r e d by of f i c i a l s i n
t he C om m i t t e e of P e r m a ne nt R e pr e s e nt a t i ve s i n B r us s e l s ( C O R E P E R ) ;
E c oF i n m e e t i ngs a r e of t e n pr e pa r e d by t he of f i c i a l – l e ve l E c onom i c a nd
F i na nc i a l C om m i t t e e ; a nd t he r e i s a l s o a e ur o w or ki ng gr oup. T he C ounc i l
pr e s i de nc y r ot a t e s e ve r y s i x m ont hs f r om one c ount r y t o a not he r , t hough
t hi s s ys t e m ha s be e n m odi f i e d, unde r L i s bon, by t he a r r i va l of a pe r m a ne nt
pr e s i de nt of t he E ur ope a n C ounc i l a nd a hi gh r e pr e s e nt a t i ve f or f or e i gn
pol i c y , w ho c ha i r s C ounc i l m e e t i ngs of f or e i gn m i ni s t e r s a s w e l l a s be i ng a
vi c e – pr e s i de nt of t he C om m i s s i on.
T he E ur ope a n C ounc i l i s , i n e f f e c t , t he m os t s e ni or f or m a t i on of t he
C ounc i l of M i ni s t e r s . I t di d not e xi s t a t t he s t a r t of t he E ur ope a n pr oj e c t ,
but ove r t i m e t h e pr a c t i c e of c a l l i ng oc c a s i ona l s um m i t m e e t i n gs of he a ds
of s t a t e a nd gov e r nm e nt t o gi ve ge ne r a l di r e c t i on a nd t o r e s ol ve t he m os t
c ont e nt i ous di s put e s be c a m e ha bi t ua l . U nde r L i s bon, t he E ur ope a n
C ounc i l ha s a f ul l – t i m e pr e s i de nt , c ur r e nt l y B e l gi um ’ s H e r m a n V a n
R om puy , w ho s e r ve s f or a m a xi m um of f i ve ye a r s ( hi s t e r m e xpi r e s a t t he
e nd of 2014) . V a n R om puy ha s s e t t he pa t t e r n of hol di ng E ur ope a n C ounc i l
m e e t i ngs e ve r y t w o m ont hs or s o. T he s e s um m i t s ha ve of t e n r e c e i ve d
m uc h publ i c i t y , e s pe c i a l l y dur i ng t he e ur o c r i s i s w he n t he y ha ve of t e n
dr i f t e d i nt o w e e ke nds a nd t he e a r l y hour s of t he m or ni ng. O ve r t i m e , t he
E ur ope a n C ounc i l ha s be c om e t he s t r a t e gi c e ngi ne of t he E ur op e a n U ni on,
l a r ge l y di s pl a c i n g t he C om m i s s i on, a s w i t c h t ha t ha s be c om e e ve n c l e a r e r
a s a r e s ul t of t he e ur o c r i s i s .
T he C om m i s s i o n m a ke s m os t of i t s l e gi s l a t i ve pr opos a l s j oi nt l y t o t he
C ounc i l a nd t he E ur ope a n P a r l i a m e nt , t he s e c ond l e gi s l a t i ve body i n t he
E U . T he P a r l i a m e nt , w hi c h ha s be e n di r e c t l y e l e c t e d s i nc e 197 9, now ha s
751 m e m be r s . A t F r e nc h i ns i s t e nc e , i t i s f or m a l l y ba s e d i n S t r a s bour g f or
m os t of i t s m ont hl y pl e na r y s e s s i ons , a l t hough i t s c om m i t t e e s a nd m os t of

i t s m e m be r s ( M E P s ) a r e ge ne r a l l y ba s e d i n B r us s e l s . E l e c t i ons a r e he l d
e ve r y f i ve ye a r s : t he 2014 one s a r e s c he dul e d t o t a ke pl a c e be t w e e n M a y
22nd a nd M a y 25t h. S uc c e s s i ve t r e a t i e s ha ve gi ve n t he P a r l i a m e nt e ve r –
gr e a t e r pow e r s , a nd i t i s now m or e or l e s s c o- e qua l w i t h t he C ounc i l of
M i ni s t e r s i n l e gi s l a t i on. T he E ur ope a n P a r l i a m e nt m us t a ppr ove t he
a nnua l budge t a s w e l l a s t he m ul t i – a nnua l f i na nc i a l f r a m e w or k. I t c a n
r e j e c t t h e budge t ( i t di d s o i n D e c e m be r 1979) . U nl i ke t he C ounc i l , i t c a n
a l s o s a c k t he C om m i s s i on ( i t us e d t hi s pow e r t o f or c e t he S a nt e r
C om m i s s i on’ s r e s i gna t i on i n 1999) . A nd, a ga i n unde r L i s bon, t he
P a r l i a m e nt now ha s t he pow e r t o “ e l e c t ” t he C om m i s s i on pr e s i de nt , a f t e r
he o r s h e i s nom i na t e d by t he E ur ope a n C ounc i l , a pr ovi s i on t ha t c r e a t e s
a n obvi ous r i s k of a huge i ns t i t ut i ona l bus t – up.
T he m os t i m por t a nt r e m a i ni ng i ns t i t ut i on i s t he E ur ope a n C our t of
J us t i c e , ba s e d i n L uxe m bour g , w hi c h a c t s a s t he E ur ope a n U ni on’ s
s upr e m e c our t a nd a dj udi c a t e s o n di s put e s bot h a m ong t he i ns t i t ut i ons a nd
be t w e e n c ount r i e s i n a r e a s of E U c om pe t e nc e ( s o i t ha s no r ol e i n t he
c r i m i na l l a w , f or e xa m pl e ) . T he c our t ha s one j udge pe r c ount r y , t hough
t he r e i s a l s o a C our t of F i r s t I ns t a nc e t o r e duc e i t s w or kl oa d. C a s e s a r e
us ua l l y de c i de d by s i m pl e m a j or i t y . T he C our t of J us t i c e ( not t o be
c onf us e d w i t h t he S t r a s bour g- ba s e d E ur ope a n C our t of H um a n R i ght s , pa r t
of t h e C ounc i l of E ur ope ) ha s a dva nc e d E ur ope a n i nt e gr a t i on i n s e ve r a l
j udgm e nt s , not a bl y t he 1963 V an G e n d e n L oos c a s e , w hi c h e s t a bl i s he d t he
pr i nc i pl e of t he s upr e m a c y of E ur ope a n ove r na t i ona l l a w , a n d t he 1979
C as s i s de D i j on j udgm e nt , w hi c h l a i d dow n t ha t goods s ol d i n one c ount r y
m us t be a bl e t o be s ol d i n a l l . O t he r E U bodi e s i nc l ude t he C our t of
A udi t or s a nd t he E ur ope a n I nve s t m e nt B a nk, bot h ba s e d i n L uxe m bour g,
t he E c on om i c a nd S oc i a l C om m i t t e e a nd t he C om m i t t e e of R e gi ons , bot h
ba s e d i n B r us s e l s – a nd a pl e t hor a of s m a l l e r a ge nc i e s s c a t t e r e d r i ght
a c r os s E ur ope .2
T he s e i n s t i t ut i ons ope r a t e c ol l e c t i ve l y by t he “ c om m uni t y m e t hod” .
T hi s de s c r i be s t he c l a s s i c a l pa t h of E U l e gi s l a t i on: a pr opos a l i s m a de by
t he C om m i s s i on; i t i s a dopt e d b y c o- de c i s i on be t w e e n t he C ounc i l a nd t he
E ur ope a n P a r l i a m e nt , of t e n f ol l ow e d by “ t r i l ogue ” be t w e e n t he t w o a nd
t he C om m i s s i on t o r e c onc i l e t he i r pos i t i ons ; i t i s t he n i m pl e m e nt e d by
na t i ona l a ut hor i t i e s a nd i s s ubj e c t t o t he j ur i s di c t i on of t h e C our t of

J us t i c e . B ut a t m a ny t i m e s i n t he pa s t , a nd a ga i n dur i ng t he e ur o c r i s i s ,
na t i ona l gove r n m e nt s , e s pe c i a l l y t hos e of t he U K a nd F r a nc e , ha ve j i bbe d
a ga i ns t t he c om m uni t y m e t hod. P r e s i de nt de G a ul l e ’ s F ouc he t pl a n w oul d
ha ve s e t up i nt e r – gove r nm e n t a l i ns t i t ut i ons a l ongs i de t h e B r us s e l s
m a c hi ne r y . T he M a a s t r i c ht t r e a t y i nt r oduc e d t w o ne w “ pi l l a r s ” f or f or e i gn
a nd s e c u r i t y pol i c y a nd f or j us t i c e a nd hom e a f f a i r s , i n w hi c h t he r ol e s of
t he C om m i s s i on a nd t he P a r l i a m e nt w e r e l i m i t e d a nd l e gi s l a t i on w a s not
ge ne r a l l y j us t i c i a bl e a t t he C our t of J us t i c e , unl i ke m os t ot he r E U
a c t i vi t i e s .
I n p r a c t i c e m os t s uc h e f f or t s t o w or k out s i de t he “ c om m uni t y m e t hod”
ha ve pr ove d uns a t i s f a c t or y . T h e F ouc he t pl a n di d not ge t a nyw he r e . T he
M a a s t r i c ht pi l l a r s ha ve , unde r t he L i s bon t r e a t y , be e n s ubs um e d ba c k
w i t hi n t he f i r s t pi l l a r . Y e t m a ny na t i ona l gove r nm e nt s , i nc l udi ng now
G e r m a ny , s t i l l l i ke t he s i m pl i c i t y of w or ki ng i nt e r – gove r nm e nt a l l y . D ur i ng
t he e ur o c r i s i s , A nge l a M e r ke l ha s of t e n pr a i s e d t he “ uni on m e t hod” ,
w hi c h dow ngr a d e s t he r ol e s of t he C om m i s s i on, t he P a r l i a m e nt a nd t he
C our t of J us t i c e .
E n t e r t h e E C B
S e ve r a l i ns t i t ut i ons f or t he s i ngl e c ur r e nc y w e r e bol t e d ont o t he s ys t e m
a f t e r t h e M a a s t r i c ht t r e a t y w a s r a t i f i e d. F or e m os t a m ong t he s e i s t he
E ur ope a n C e nt r a l B a nk, w hi c h s t a r t e d w or k i n J une 1998 ( i t ha d a
f or e r unne r , t he E ur ope a n M one t a r y I ns t i t ut e , s e t up i n 1994) . T he E C B ,
w hi c h a t G e r m a n i ns i s t e nc e i s ba s e d i n F r a nkf ur t , hom e of t he
B unde s ba nk, s i t s a t t he a pe x of w ha t i s c a l l e d t he E ur ope a n S ys t e m of
C e nt r a l B a nks , t o w hi c h a l l na t i ona l c e nt r a l ba nks be l ong ( e ve n t hos e f r om
E U c ount r i e s s t i l l out s i de t he e ur o) . T he E C B ha s a s i x- s t r ong e xe c ut i ve
boa r d, he a de d by a pr e s i de nt a nd a vi c e – pr e s i de nt , a l l of w hom s e r ve
s i ngl e e i ght – ye a r t e r m s . I t s gove r ni ng c ounc i l c ons i s t s of t hi s boa r d pl us
t he gove r nor s o f t he na t i ona l c e nt r a l ba nks of c ount r i e s i n t he e ur o. I t
nor m a l l y t a ke s de c i s i ons by s i m pl e m a j or i t y . T he i ni t i a l s ys t e m of one
vot e pe r c ounc i l m e m be r i s t o b e s upe r s e de d, m os t pr oba bl y dur i ng 2015,
by a n a r r a nge m e nt t ha t w i l l gi ve t he e xe c ut i ve boa r d s i x vot e s , a dd f our
vot e s t h a t r ot a t e a m ong t he f i v e bi gge s t e ur o m e m be r s a nd gi ve t he r e s t ,
no m a t t e r how m a ny t he r e a r e , 11 vot e s i n t ot a l ( t hi s c ha nge c r e a t e s a t

l e a s t t he t he or e t i c a l pos s i bi l i t y t ha t t he B unde s ba nk’ s pr e s i de n t m i ght not
a l w a ys ha ve a vot e on t he c ounc i l ) .
T he E C B w a s m ode l l e d on t he G e r m a n B unde s ba nk but i s i n m a ny
w a ys e ve n m or e pow e r f ul a nd i nde pe nde nt . I t s goa l , f i xe d by t he
M a a s t r i c ht t r e a t y , i s pr i c e s t a bi l i t y ( c l os e t o but be l ow 2% ) , w he r e a s t he
F e de r a l R e s e r ve , i t s A m e r i c a n c ount e r pa r t , i s a l s o r e qui r e d t o pa y
a t t e nt i on t o e m pl oym e nt . I t s ope r a t i ona l i nde pe nde nc e i n de l i ve r i ng t he
goa l of pr i c e s t a bi l i t y , w hi c h i t de f i ne s i t s e l f , i s a l s o gua r a nt e e d by t he
s a m e t r e a t y . U nl i ke ot he r c e nt r a l ba nks , i t ha s no s i ngl e gove r nm e nt or
f i na nc e m i ni s t r y t o i nt e r a c t w i t h a nd r e por t t o, t hough i t s pr e s i de nt
t e s t i f i e s be f or e t he E ur ope a n P a r l i a m e nt a nd a t t e nds m os t m e e t i ngs of t he
E ur ope a n C ounc i l a nd of t e n E c oF i n a nd t he E ur ogr oup a s w e l l . I n l i ne
w i t h t he B unde s ba nk m ode l , w he n E M U a r r i ve d t he E C B w a s not gi ve n
ove r a l l r e s pons i bi l i t y f or ba nk s upe r vi s i on, w hi c h s t a ye d a t na t i ona l l e ve l ,
a n a r r a n ge m e nt t ha t ha s s i nc e be e n de e m e d uns a t i s f a c t or y , w i t h t he
pl a nne d “ ba nki ng uni on” gi vi ng s upe r vi s i on of m os t l a r ge E ur ope a n ba nks
t o t h e E C B . I t a l s o ha d no obl i ga t i on t o a c t a s t he s ys t e m ’ s l e nde r of l a s t
r e s or t , a huge pot e nt i a l pr obl e m onc e i t t ook ove r t he o pe r a t i on of
m one t a r y pol i c y f r om na t i ona l c e nt r a l ba nks .
O ne bi g di f f e r e nc e be t w e e n t he E C B a nd m os t ot he r c e nt r a l ba nks i s
t ha t i t i s m uc h s m a l l e r ( i t ha s a s t a f f of l e s s t ha n 1,000) a nd a l s o, be c a us e
of t he c ont i nui ng r ol e of t he na t i ona l c e nt r a l ba nks , a l ot m or e
de c e nt r a l i s e d. T ha t m a ke s t he r ol e of t he pr e s i de nt , t he E C B ’ s publ i c f a c e ,
e s pe c i a l l y i m po r t a nt . G i ve n t hi s , i t w a s f ool i s h a nd da nge r ous w he n t he
E ur ope a n C ounc i l c hos e t o w e l c om e t he ne w ba nk w i t h a n a l l – da y w r a ngl e
i n M a y 1998 ove r w ho s houl d be i t s pr e s i de nt . T he j ob ha d l ong be e n
i nt e nde d t o go t o W i m D ui s e nbe r g, a f or m e r D ut c h c e nt r a l ba nke r w ho ha d
r un t he E ur ope a n M one t a r y I ns t i t ut e . B ut a t t he l a s t m i nut e t he F r e nc h
pr e s i de nt , J a c qu e s C hi r a c , put f or w a r d J e a n- C l a ude T r i c he t f or t he j ob.
T he out c om e w a s a bot c he d a nd undi gni f i e d c om pr om i s e i n w hi c h t he
t e r m w a s i nf or m a l l y s pl i t be t w e e n t he t w o m e n. D ui s e nbe r g s t e ppe d dow n
i n 2003, l e a vi ng T r i c he t t o s e r ve a c om pl e t e e i ght – ye a r t e r m , unt i l he i n
t ur n w a s r e pl a c e d by a n I t a l i a n, M a r i o D r a ghi , i n 2011.
T he l a c k of a ny s t r ong pol i t i c a l a ut hor i t y t o a c t a s a c ount e r pa r t t o t he
E C B w a s obvi ous f r om t he s t a r t . T he C om m i s s i on ha s s c a r c e l y m or e
a c c ount a bi l i t y t ha n t he ba nk. T he E ur ope a n P a r l i a m e nt i s e l e c t e d, but i t

ha s no e xe c ut i ve a ut hor i t y . T he E ur ope a n C ounc i l a nd E c oF i n i nc l ude non-
m e m be r s of t he e ur o. F r om a n e a r l y s t a ge t he F r e nc h pus he d f or t he
c r e a t i on of s om e f or m of “ e c onom i c gove r nm e nt ” , but t he G e r m a ns
r e s i s t e d t he c onc e pt i n or de r t o s a f e gua r d t he E C B ’ s i nde pe nde nc e .
I ns t e a d, i n 1998 E ur ope a n gove r nm e nt s c a m e up w i t h t he i de a of a
“ E ur ogr oup” of f i na nc e m i ni s t e r s . F i na nc e m i ni s t e r s f r om non- e ur o
c ount r i e s f i e r c e l y r e s i s t e d t h e E ur ogr oup’ s e s t a bl i s hm e nt . T he U K ’ s
G or don B r ow n, t he n c ha nc e l l or of t he e xc he que r , t r i e d ha r d t o j oi n a s a n
obs e r ve r a t t he gr oup’ s f i r s t m e e t i ng a t t he C hâ t e a u de S e nni nge n i n
L uxe m bour g i n J une 1997, onl y t o be t ol d by hi s F r e nc h c ount e r pa r t ,
D om i ni que S t r a us s – K a hn, t ha t t he e ur o w a s l i ke a m a r r i a ge a nd t ha t , i n a
m a r r i a ge , one di d not i nvi t e s t r a nge r s i nt o t he be dr oom ( a p r e c e pt t ha t
S t r a us s – K a hn ha s f ol l ow e d onl y e r r a t i c a l l y i n hi s ow n l i f e ) .
I n a ny e ve nt t he E ur ogr oup s oon be c a m e a c c e pt e d, a nd i t e ve n
a c qui r e d i t s ow n pe r m a ne nt c ha i r m a n: f i r s t , J e a n- C l a ud e J unc ke r ,
L uxe m bour g’ s pr i m e m i ni s t e r a nd f i na nc e m i ni s t e r , a nd t he n, f r om t he e nd
of 2 012, J e r oe n D i j s s e l bl oe m , t he D ut c h f i na nc e m i ni s t e r . B y t hi s t i m e i t
ha d a l s o be c om e a c c e pt e d, on c e a ga i n ove r obj e c t i ons f r om c ount r i e s
out s i de t he e ur o, s uppor t e d by G e r m a ny , t ha t E ur ope a n he a ds of
gove r nm e nt s houl d m e e t pe r i odi c a l l y i n e ur o- z one s um m i t s , us ua l l y j us t
a f t e r f ul l E ur ope a n C ounc i l s . I n e i t he r f or m a t i on, t he E ur ogr oup ha s no
s t a t ut or y ba s i s a nd no l e gi s l a t i ve pow e r s . B ut i t ha s be c om e a n e s s e nt i a l
pa r t of t he s i ngl e c ur r e nc y’ s a r c hi t e c t ur e .
A not he r c om pone nt i s t he “ e xc e s s i ve de f i c i t pr oc e dur e ” . T hi s be ga n i n
t he M a a s t r i c ht t r e a t y a nd w a s r e f or m ul a t e d i nt o t he s t a bi l i t y a nd gr ow t h
pa c t , w h i c h w a s a ppr ove d i n 19 97. H ow e ve r , f r om t he ve r y be gi nni ng t he
r ul e s a ga i ns t e xc e s s i ve de f i c i t s a nd publ i c – de bt l e ve l s w e r e i nt e r pr e t e d
f l e xi bl y , not l e a s t s o t ha t B e l gi um a nd I t a l y c oul d j oi n t he s i ng l e c ur r e nc y .
T he s t a bi l i t y pa c t ’ s pr ovi s i ons f or s a nc t i ons w e r e w a t e r e d dow n i n
ne got i a t i on f r om be i ng a ut om a t i c , a s t he G e r m a ns or i gi na l l y w a nt e d, t o
r e qui r i ng qua l i f i e d- m a j or i t y a ppr ova l by t he C ounc i l . E ve n s o, t he pa c t
a t t r a c t e d m uc h c r i t i c i s m f r om e c onom i s t s , w ho f e l t t ha t , gi ve n e ur o- z one
c ount r i e s ’ l os s of a n i nde pe nde nt m one t a r y a nd e xc ha nge – r a t e pol i c y , m or e
not l e s s f i s c a l f l e xi bi l i t y m i ght be ne e de d. I t w a s a l s o t hought t ha t
i m pos i ng c e nt r a l r ul e s m i ght unde r m i ne t he f or c e of t he t r e a t y’ s “ no- ba i l –
out ” pr ovi s i ons , be c a us e i t w oul d i m pl y a hi gh de gr e e of c e nt r a l i nt r us i on.

B e t t e r , m a ny a r gue d, t o r e l y on t he bond m a r ke t s t o i m pos e di s c i pl i ne on
a ny c ount r y t ha t bor r ow e d s o m uc h t ha t i t l ooke d t o be a t r i s k of
de f a ul t i ng.3
T he pa c t ’ s c r e di bi l i t y w a s f ur t he r de nt e d i n 2002 w he n R om a no P r odi ,
pr e s i de nt of t he C om m i s s i on, c a l l e d i t “ s t upi d” . P or t uga l w a s t he f i r s t
c ount r y t o ge t i nt o di f f i c ul t i e s , a nd i t w a s dul y r e qui r e d t o a m e nd i t s
budge t t o c om pl y w i t h t he pa c t . B ut i t w a s ne ve r l i ke l y t o c ons t r a i n bi gge r
c ount r i e s a nd, i n l a t e 2003, i t s pot e nc y w a s a l m os t e nt i r e l y de s t r oye d w he n
F r a nc e a nd, i r oni c a l l y , G e r m a ny i t s e l f pe r s ua de d t he C ounc i l t o ove r r i de a
C om m i s s i on r e c om m e nda t i on t ha t bot h c ount r i e s s houl d c ut t he i r budge t
de f i c i t s , w hi c h ha d dr i f t e d a bove 3% of G D P .4
T he gut t i ng of t he s t a bi l i t y pa c t m a de i t l e s s of a s ur pr i s e , w he n t he
f i na nc i a l c r i s i s hi t i n 2008, t ha t t he de f i c i t s a nd de bt l e ve l s of m os t e ur o-
z one c ount r i e s w e nt a bove t he M a a s t r i c ht c e i l i ngs . N a t ur a l l y , t he c r i s i s
a l s o pr o m pt e d c a l l s f or a r e vi va l of t he e xc e s s i ve de f i c i t s pr oc e dur e , but
w i t h ne w t e e t h. I t s ne w i nc a r n a t i on, a dopt e d i n l a t e 2011, i nc l ude s t he
“ t w o- pa c k” a nd “ s i x- pa c k” a nd s e t s out a “ E ur ope a n s e m e s t e r ” . E ur o- z one
c ount r i e s now ha ve t o s ubm i t t he i r dr a f t budge t s t o t he C om m i s s i on i n
a dva nc e , a nd t he C om m i s s i on c a n r e que s t c ha nge s be f or e na t i ona l
pa r l i a m e nt s e ve n ha ve a c ha nc e t o c ons i de r t he m . A ne w e xc e s s i ve
i m ba l a nc e s pr oc e dur e ha s a l s o be e n a dde d, e na bl i ng t he C om m i s s i on t o
m oni t or a nd m a ke r e c om m e nda t i ons f or c ount r i e s t ha t , a m ong ot he r
t hi ngs , r un l a r ge c ur r e nt – a c c o unt i m ba l a nc e s ( de f i ne d, w i t h a nod t o
c hr oni c a l l y unde r c ons um i ng G e r m a ny , a s 4% of G D P f or de f i c i t s but 6%
of G D P f or s ur pl us e s ) .
I n t e r m s of s a nc t i ons , t he ne w pr oc e dur e s l ook s i m i l a r t o t he ol d
e xc e pt t ha t now a C om m i s s i on r e c om m e nda t i on w i l l be a ut om a t i c a l l y
a dopt e d unl e s s a qua l i f i e d m a j o r i t y i n t he C ounc i l vot e s a ga i n s t i t . S uc h a
ne ga t i ve qua l i f i e d- m a j or i t y pr oc e dur e i s a l s o e ns hr i ne d i n t he “ f i s c a l
c om pa c t ” t r e a t y , w hi c h w a s a ppr ove d a nd r a t i f i e d i n 2012 a s a n i nt e r –
gove r nm e nt a l t r e a t y us i ng t he “ uni on m e t hod” , pa r t l y be c a us e s e ve r a l
gove r nm e nt s i n c l udi ng F r a nc e ’ s a nd G e r m a ny’ s l i ke d i t t ha t w a y , pa r t l y
be c a us e t he U K a nd t he C z e c h R e publ i c r e f us e d t o s i gn i t ( t he C z e c hs now
pl a n t o do s o) a nd pa r t l y be c a us e i t a l l ow e d t he t r e a t y’ s dr a f t e r s t o pr ovi de
t ha t i t w oul d c om e i nt o f or c e e v e n i f s om e c ount r i e s f a i l e d t o r a t i f y i t . T he

f i s c a l c om pa c t r e qui r e s a l l s i gna t or i e s t o i ns e r t de bt br a ke s i nt o t he i r
na t i ona l c ons t i t ut i ona l a r r a nge m e nt s . I t a l s o f or m a l i s e s , w i t h t he E ur o P l us
P a c t , t he e xi s t e nc e of e ur o s um m i t s , a l ongs i de E ur ope a n C ounc i l s .
T he e ur o c r i s i s ha s a dde d a s e t of f ur t he r , a d hoc pi e c e s t o t he s i ngl e
c ur r e nc y’ s i ns t i t ut i ona l a r c hi t e c t ur e , m a ny of t he m a l s o s e t up on t he uni on
m e t hod. F i r s t c a m e t he t e m por a r y E ur ope a n F i na nc i a l S t a bi l i t y F a c i l i t y
( E F S F ) , a n i nt e r – gove r nm e nt a l ve hi c l e s e t up i n a r us h a f t e r t h e r e s c ue of
G r e e c e i n M a y 2 010. A l ongs i de t hi s t he r e i s a s m a l l e r E ur ope a n F i na nc i a l
S t a bi l i t y M e c ha ni s m , w hi c h us e s t he E U budge t a s c ol l a t e r a l . B ot h f unds
a r e be i ng s ubs um e d i nt o t he pe r m a ne nt t r e a t y- ba s e d E ur ope a n S t a bi l i t y
M e c ha ni s m ( E S M ) . T he E S M w a s s e t up a s a n or ga ni s a t i on unde r publ i c
i nt e r na t i ona l l a w w i t h a boa r d of gove r nor s ( t ha t i s , f i na nc e m i ni s t e r s ) a nd
a m a na gi ng di r e c t or , K l a us R e gl i ng, pr e vi ous l y t he C o m m i s s i on’ s
e c onom i c s di r e c t or – ge ne r a l . A l t hough a n i nt e r – gove r nm e nt a l body , t he
E S M ha s ope r a t i ona l l i nks t o t he C om m i s s i on a nd i s a l s o s u bj e c t t o t he
j ur i s di c t i on of t he E ur ope a n C our t of J us t i c e .
T r e a t i e s , t r e a t i e s
O ne r e a s on i t i s of t e n ha r d f or out s i de r s t o unde r s t a nd how e i t he r t he E U
or t h e e ur o w or ks i s t ha t , f or t he pa s t 25 ye a r s or s o, t he e nt i r e E ur ope a n
pr oj e c t h a s be e n goi ng t hr ough a ve r i t a bl e or gy of t r e a t y- m a ki n g. A f t e r t he
S i ngl e E ur ope a n A c t of 1986 a n d t he M a a s t r i c ht t r e a t y , s i gne d i n F e br ua r y
1992, t h e r e w a s but a s hor t pa us e be f or e t he A m s t e r da m t r e a t y of 1997 a nd
t he n t he N i c e t r e a t y of 2001. E a c h t i m e , i t s e e m e d, t he dr i vi ng f or c e f or
s uc c e s s i ve t r e a t i e s w a s a w i de s pr e a d f e e l i ng of di s s a t i s f a c t i on a t w ha t ha d
be e n don e on t he pr e vi ous oc c a s i on a nd a t w ha t ha d f a i l e d t o b e a gr e e d or
ha d be e n l e f t ou t . T he e xpa ns i on of t he E ur ope a n U ni on t o t a ke i n A us t r i a ,
F i nl a nd a nd S w e de n i n 1995 a nd, i n a f a r bi gge r c ha l l e nge , e i ght c e nt r a l
a nd e a s t e r n E ur ope a n c ount r i e s f r om t he f or m e r S ovi e t bl oc k pl us C ypr us
a nd M a l t a i n 2004 w a s a not he r c ons i de r a t i on.
E ve n a s t he e ur o e m e r ge d f r om i nf a nc y i n D e c e m be r 2001, j us t be f or e
t he da t e f or t he i s s ue of e ur o not e s a nd c oi ns , E U l e a de r s , m e e t i ng i n
L a e ke n i n B e l gi um , de c i de d t o ha ve one m or e go a t t he i r gove r ni ng
t r e a t i e s . T hi s t i m e t he y s e t up a c onve nt i on on t he f ut ur e of E ur ope ,
c ha i r e d by a f or m e r F r e nc h pr e s i de nt , V a l é r y G i s c a r d d’ E s t a i ng, w hi c h

s w i f t l y de c i de d, a m i d m uc h e xc i t e d c ha t t e r dr a w i ng a na l ogi e s w i t h
P hi l a de l phi a i n 1787, t o dr a w up a c om pl e t e ne w c ons t i t ut i on f or t he E U .
T he t e x t of t hi s c ons t i t ut i ona l t r e a t y w a s br oa dl y e ndor s e d by a n i nt e r –
gove r nm e nt a l c onf e r e nc e a nd t h e n a dopt e d a t a E ur ope a n C ounc i l m e e t i ng
i n 2 004. B ut a f t e r t ha t t he t r oubl e be ga n, be c a us e no f e w e r t ha n t e n
c ount r i e s a nnou nc e d pl a ns t o put t he dr a f t c ons t i t ut i on t o na t i ona l
r e f e r e ndum s be f or e r a t i f i c a t i on.5
S e ve r a l t r e a t y r e f e r e ndum s ha d be e n he l d be f or e , a nd i n s om e c a s e s
t r e a t i e s ha d be e n r e j e c t e d onl y t o be put t o t he vot e a ga i n ( t hi s ha ppe ne d i n
D e nm a r k ove r M a a s t r i c ht a nd I r e l a nd ove r N i c e ) . B ut ne ve r h a d s o m a ny
r e f e r e ndum s be e n pr om i s e d a t o nc e . I n t he e ve nt , i t s houl d not ha ve c om e
a s a huge s ur pr i s e w he n t w o o f t he f i r s t f our s a i d no: i n F r a n c e on M a y
29t h 2005 a nd t he n i n t he N e t h e r l a nds on J une 3r d 2005, i n bot h c a s e s by
l a r ge m a j or i t i e s . T he e xpe di e nt of m a ki ng a f e w m odi f i c a t i ons a nd a s ki ng
s i ngl e s m a l l c o unt r i e s t o vot e a ga i n w a s c l e a r l y not goi ng t o w or k w i t h
s uc h l a r ge f ounde r m e m be r s . S o t he c ons t i t ut i on w a s a ba ndone d.
T he i m m e di a t e i m pa c t of t hi s s e t ba c k on t he e ur o m a y ha ve s e e m e d
s l i ght . B ut i t f o s t e r e d a br oa de r s e ns e of c r i s i s i n t he E U a s a w hol e . O ne
r e a s on w a s t ha t i t m a de e ve r y body l e e r y of f ur t he r a t t e m pt s a t t r e a t y
c ha nge , a f e e l i ng t ha t ha s pe r s i s t e d i nt o t he e ur o c r i s i s . T he gl oom w a s
i nt e ns i f i e d by t he c oi nc i de nc e of ye t a not he r r ow ove r t he E U ’ s budge t .
A l t hough t he budge t i s s m a l l , a t l i t t l e m or e t ha n 1% of E U – w i de G D P , i t s
e xc e s s i ve s pe ndi ng on a gr i c ul t u r e a nd i t s s ke w e d ne t be ne f i t s ha ve c a us e d
r e pe a t e d a r gum e nt s a t l e a s t s i nc e M a r ga r e t T ha t c he r c a m e t o pow e r i n t he
U K i n 1979 a nd pr om pt l y de m a nde d “ m y m one y ba c k” . H e r de t e r m i ne d
ha ndba ggi ng of f e l l ow E ur ope a n l e a de r s e ve nt ua l l y pr oduc e d a s e r i e s of a d
hoc r e ba t e s , f ol l ow e d by a pe r m a ne nt a ba t e m e nt of t he ne t B r i t i s h budge t
c ont r i but i on, w h i c h w a s a gr e e d a t a E ur ope a n C ounc i l i n F ont a i ne bl e a u i n
1984.6
D e s pi t e t hi s de a l , s ubs e que nt ne got i a t i ons on t he E U ’ s m ul t i a nnua l
f i na nc i a l f r a m e w or k ha ve pr ove d a l m os t e qua l l y c ont e nt i ous , a nd t he one
i n 2005 w a s no e xc e pt i on. T he U K , w hi c h w a nt e d a s m a l l e r budge t , l e s s
s pe ndi ng on a gr i c ul t ur e a nd t o pr e s e r ve i t s r e ba t e unt ouc he d, w a s onc e
a ga i n i n t he dog hous e , but s e ve r a l ot he r c ount r i e s f a vour e d budge t a r y c ut s
w hi l e t h e ne w m e m be r s f r om c e nt r a l a nd e a s t e r n E ur ope w a nt e d f a r m or e

s pe ndi ng. A c om pr om i s e w a s r e a c he d onl y a t t he e nd of t he ye a r , w he n t he
B r i t i s h pr i m e m i ni s t e r , T ony B l a i r , ga ve up pa r t of t he r e ba t e t o e ns ur e t ha t
t he U K w oul d b e a r a f a i r s ha r e of t he c os t s of e nl a r ge m e nt t o t he e a s t . B ut
t he s our a t m os phe r e he l pe d t o c l oud m uc h ot he r bus i ne s s , i nc l udi ng t ha t of
t he e ur o . J unc ke r , a s pr e s i de nt o f t he C ounc i l , de c l a r e d t ha t t he E U w a s “ i n
de e p c r i s i s ” .
T he gl o om a l s o s pi l t ove r i nt o t he ot he r bi g i s s ue f a c i ng E ur ope a n
l e a de r s a t t he s t a r t of 2006: w ha t t o do a bout t he f a i l e d c ons t i t ut i ona l
t r e a t y . O n t hi s t he ke y pe r s on w a s t he ne w G e r m a n c ha nc e l l or , A nge l a
M e r ke l , w ho t ook of f i c e i n l a t e 2005 a t t he he a d of a “ gr a nd c oa l i t i on”
be t w e e n he r C hr i s t i a n D e m oc r a t s a nd t he S oc i a l D e m oc r a t s . S he w a s
de t e r m i ne d t o r e vi ve a s m uc h a s s he c oul d f r om t he c ons t i t ut i on, not l e a s t
be c a us e t he ne w vot i ng s ys t e m t ha t i t pr opos e d a t l ong l a s t r e c ogni s e d t ha t
G e r m a ny’ s popu l a t i on i s l a r ge r t ha n t ha t of ot he r E U c ount r i e s . A f t e r he r
f e l l ow c e nt r e – r i ght l e a de r , N i c ol a s S a r koz y , be c a m e F r e nc h pr e s i de nt i n
m i d- 2007, t he t w o pr e s s e d a he a d w i t h w ha t l a t e r be c a m e t he L i s bon t r e a t y ,
w hi c h i n c or por a t e d m os t of w ha t ha d be e n i n t he c ons t i t ut i on but i n a
di s gui s e d a nd l e s s c om pr e he ns i bl e f a s hi on.
C r i t i c s c om pl a i ne d t ha t r e vi vi ng t he t r e a t y i n t hi s w a y w a s a b a c kdoor
r out e a r ound t he ne ga t i ve vot e s i n F r a nc e a nd t he N e t he r l a nds . T he y
obj e c t e d e ve n m or e voc i f e r ous l y w he n a l m os t a l l E U l e a de r s , i nc l udi ng
t he F r e nc h a nd t he D ut c h, s a i d t he y w oul d not t r y t o r a t i f y L i s bon by
r e f e r e ndum s but us e pa r l i a m e nt a r y vot e s i ns t e a d. T he e xc e pt i on w a s
I r e l a nd, w hi c h w a s c ons t i t ut i ona l l y r e qui r e d t o hol d a r e f e r e ndum . Y e t
a ga i n, I r i s h vot e r s s a i d no, t hi s t i m e i n J une 2008. B ut j us t ove r a ye a r
l a t e r , a f t e r t he f i na nc i a l c r i s i s ha d s t r uc k, t he y w e r e pe r s ua de d t o c ha nge
t he i r m i nds i n a f r e s h vot e , s o L i s bon w a s f i na l l y a ppr ove d i n l a t e 2009.
T he ne w pe r m a ne nt pr e s i de nt of t he E ur ope a n C ounc i l , H e r m a n V a n
R om puy of B e l gi um , a nd t he ne w hi gh r e pr e s e nt a t i ve f or f or e i gn a nd
s e c ur i t y pol i c y , B a r one s s C a t he r i ne A s ht on of t he U K , w e r e c hos e n a t a
s um m i t s hor t l y a f t e r w a r ds , a f t e r ye t a not he r w r a ngl e . B ut by t he n t he
f oc us of a t t e nt i on w a s s t a r t i ng t o s hi f t t o t he c r i s i s i n G r e e c e – a nd
pa r t i c ul a r l y t o t he f i s c a l pr obl e m s of a ne w l y e l e c t e d G r e e k S oc i a l i s t
gove r nm e nt .

4 B u i l d – u p t o a c r i s i s
IF THERE IS AN ORIGINAL SIN i n t he c r e a t i on of t he e ur o, i t i s , f or m a ny i n
B e r l i n a nd B r us s e l s , t he br e a c h of t he s t a bi l i t y a nd gr ow t h pa c t i n 2003.
G e r m a ny a nd F r a nc e c ol l ude d t o bl oc k a ny of f i c i a l r e buke or s a nc t i ons f or
l e t t i ng t he i r budge t de f i c i t s r i s e a bove t he M a a s t r i c ht c e i l i ng of 3% of
G D P . A f t e r a ba t t l e w i t h t he E ur ope a n C om m i s s i on t ha t e nde d up a t t he
E ur ope a n C our t of J us t i c e , t he y ne got i a t e d a l oos e r ve r s i on of t he pa c t i n
2005 t ha t , t o c r i t i c s , r e nde r e d i t t oot hl e s s . F r om t he n on, s o t he s t or y goe s ,
a l l s e m bl a nc e of f i s c a l di s c i pl i ne w a s a ba ndone d. T oda y’ s G e r m a n
m i ni s t e r s c a s t i g a t e t he i r pr e de c e s s or s f or l e a di ng t he e ur o z one i nt o s i n
r a t he r t h a n vi r t u e . Y e t t hi s a c c o unt of f e r s a t be s t onl y a pa r t i a l e xpl a na t i on
of w ha t w e nt w r ong.
I t i s t r ue t ha t c ount r i e s t ha t t i ght e ne d t he i r be l t s t o qua l i f y f or
m e m be r s hi p of t he s i ngl e c ur r e nc y r e l a xe d t he i r r e f or m i ng e f f or t a f t e r i t
s t a r t e d l i f e i n 1999. M a ny f e l t t h a t i t w a s e nough t o ha ve pr ove d w r ong t he
doom – m onge r s i n t he U K a nd t he U ni t e d S t a t e s w ho ha d pr e d i c t e d e i t he r
t ha t t he e ur o w o ul d ne ve r a r r i ve or t ha t i t w oul d qui c kl y br e a k up ( a t one
poi nt i n 1999, w he n i t f e l l i n va l ue , i t w a s c hr i s t e ne d a “ t oi l e t c ur r e nc y” by
t r a de r s i n L ondon; ot he r s r e f e r r e d t o t he e ur o a s t he “ z e r o” ) . M or e ove r , a s
E ur ope t he n e nt e r e d a m i l d r e c e s s i on i n 2001–02 t he r e w e r e ot he r s ,
be yond F r a nc e a nd G e r m a ny , t ha t w e r e i n e xc e s s i ve de f i c i t . I n pur e l y
e c onom i c t e r m s , t hough, t he or i gi na l s t a bi l i t y pa c t w a s t oo r i g i d, pus hi ng
c ount r i e s i nt o pr oc yc l i c a l a us t e r i t y w he ne ve r t he y f ound t he m s e l ve s i n a
dow nt ur n. T he r e f or m e d ve r s i on m a de gr e a t e r a l l ow a nc e s f or t he i m pa c t

of t he e c onom i c c yc l e , a nd t r i e d t o s t r i p out one – of f m e a s ur e s t hr ough
w hi c h c ount r i e s s ought t o ga m e t he num be r s .
M os t e ur o- z one c ount r i e s r e m a i ne d w i t hi n t he l i m i t s a nd, i n
s ubs e que nt ye a r s , t he num be r of s i nne r s gr a dua l l y de c l i ne d. T he r e a l
f a i l i ng o f t he pa c t w a s t ha t a n obs e s s i on w i t h budge t s , e s pe c i a l l y t he
a nnua l de f i c i t s , bl i nde d m i ni s t e r s a nd of f i c i a l s t o m or e s e r i ous unde r l yi ng
pr obl e m s i n t he e ur o z one . “ T he w hol e s ys t e m w a s l ooki ng a t t h e e c onom y
t hr ough t he ke yhol e of f i s c a l p ol i c y ,” s a ys one C om m i s s i on ve t e r a n. B y
2007 t he f i s c a l s i t ua t i on ha d s e e m i ngl y ne ve r be e n be t t e r . A l l m e m be r s of
t he e ur o z one w e r e out of t he e xc e s s i ve de f i c i t pr oc e dur e ( E D P ) by m i d-
2008, a nd s o f or m a l l y de e m e d t o ha ve t he i r publ i c f i na nc e s i n or de r
t hough t he c r e d i t c r unc h w a s i nt e ns i f yi ng. T he C om m i s s i on b oa s t e d t ha t
r e f or m of t he pa c t ha d pr om ot e d di s c i pl i ne a nd na t i ona l “ o w ne r s hi p” .
E ve n G r e e c e w a s r e l e a s e d f r om t he E D P i n 2007, de s pi t e pe r s i s t e nt doubt s
a bout t he r e l i a bi l i t y of i t s f i gur e s . B ut , r a t he r a s w i t h t he e nf or c e m e nt of
t he pa c t , gove r n m e nt s w oul d not he a r of t he C om m i s s i on be i ng gi ve n t he
pow e r t o a udi t t he i r na t i ona l f i gur e s .
I t i s s i gn i f i c a nt t ha t , on t he e ve of t he c r i s i s , t hr e e of t he f i ve c ount r i e s
t ha t w oul d l a t e r ha ve t o be ba i l e d out – I r e l a nd, S pa i n a nd C ypr us – w e r e
vi r t uous by t he s t a nda r ds of t he s t a bi l i t y a nd gr ow t h pa c t . T he y w e r e
r unni ng budge t s ur pl us e s a nd ha d a s t oc k of de bt w e l l be l ow t he
M a a s t r i c ht c e i l i ng of 60% of G D P . T he i r pr obl e m w a s not a m a t t e r of poor
e nf or c e m e nt , or of f a br i c a t e d s t a t i s t i c s , but of a m i s gui de d be l i e f t ha t
c ont r ol l i ng f i s c a l pol i c y w a s a l l t ha t r e a l l y m a t t e r e d. T he c r i s i s r e ve a l e d
t he m uc h gr e a t e r i m por t a nc e of s e ve r a l ot he r f a c t or s : e c onom i c
i m ba l a nc e s , pa r t i c ul a r l y i n t he c ur r e nt a c c ount of t he ba l a nc e o f pa ym e nt s ;
pr i va t e de bt ; a nd t he r ol e of t he f i na nc i a l s e c t or i n f i na nc i ng e xt e r na l
de f i c i t s .
U n b a l a n c e d
T he f oc us on f i s c a l r ul e s ha d be e n j us t i f i e d by t w o be l i e f s . T he f i r s t w a s
t ha t , i n a s i ngl e c ur r e nc y w i t h a c om m on e xc ha nge r a t e a nd m one t a r y
pol i c y , f i s c a l s i n ne r s w e r e l e s s l i ke l y t o be puni s he d by m a r ke t s t ha t m i ght
ot he r w i s e s pe c ul a t e a ga i ns t a c ount r y i n da nge r of r unni ng i nt o pr obl e m s
of hi gh i nf l a t i o n or de bt . P r of l i ga c y i n one c ount r y c oul d t h us dr i ve up

bor r ow i ng c os t s f or a l l . T he s e c ond, c onve r s e l y , w a s t ha t a e ur o- z one
c ount r y t ha t got i nt o t r oubl e w oul d not be a bl e t o de va l ue or l oos e n
m one t a r y pol i c y , a nd w oul d not e nj oy t he s or t s of a ut om a t i c t r a ns f e r s t ha t
ope r a t e i n f e de r a l c ount r i e s , s o t he m a i n t ool t o a bs or b a s hoc k w oul d be
gr e a t e r bor r ow i ng by t he gove r nm e nt : he nc e t he ne e d f or s ound publ i c
f i na nc e s .
I n c ount r i e s w i t h t he i r ow n c ur r e nc i e s , m a r ke t s a nd pol i c ym a ke r s
c l os e l y w a t c h t he c ur r e nt a c c ou nt f or s i gns of a n e c onom y ge t t i ng out of
l i ne . T h e c ur r e nt – a c c ount ba l a n c e i s a m e a s ur e of t he ba l a nc e of t r a de ,
f or e i gn i nc om e a nd t r a ns f e r s . A de f i c i t c a n be a pr obl e m i f , s a y , i t
hi ghl i ght s a c ount r y’ s l os s of c om pe t i t i ve ne s s a nd e xpor t s ha r e ; or i t c a n
be be ni gn, i f i t r e f l e c t s gr e a t e r r e t ur ns on c a pi t a l f l ow i ng i nt o a c ount r y
unde r goi ng a pe r i od of f a s t c a t c h- up gr ow t h. C ur r e nt – a c c ount de f i c i t s m us t
by de f i ni t i on be f i na nc e d by c a pi t a l i nf l ow s . Y e t t he r e w a s a w i de s pr e a d
be l i e f , e c hoe d o n oc c a s i on by t he C om m i s s i on a nd t he E C B , t ha t , i n a
s i ngl e – c ur r e nc y z one w i t h a n i nt e gr a t e d f i na nc i a l m a r ke t , c ur r e nt – a c c ount
i m ba l a nc e s di d not m a t t e r a ny m or e t ha n t he y di d w i t hi n f e de r a l c ount r i e s
l i ke t he U ni t e d S t a t e s .
I n t he e a r l y 2000s , ye a r s t ha t be c a m e know n a s t he “ gr e a t m ode r a t i on” ,
w he n m one y w a s c he a p, e ur o- z one c ount r i e s w e r e a bl e t o bui l d up l a r ge
e xt e r na l i m ba l a nc e s ( 15% of G D P i n G r e e c e ) . H a d t he y s t i l l ha d na t i ona l
c ur r e nc i e s , t hi s w oul d s ur e l y ha ve pr ovoke d a r e s pons e f r o m m a r ke t s .
I ns t e a d, e ve r ybody be ne f i t e d f r om l ow i nt e r e s t r a t e s . T hus w a s bor n t he
gr e a t pa r a dox of e c onom i c a nd m one t a r y uni on. I n or de r f or c ount r i e s t o
s ur vi ve w i t hi n i t , t he y ne e de d t o m a ke de e pe r s t r uc t ur a l r e f or m s t o
i m pr ove t he i r c om pe t i t i ve ne s s ; a nd ye t t he pr e s s ur e t o pus h t hr ough t hos e
r e f or m s w a s r e duc e d by t he be ni gn m ood of f i na nc i a l m a r ke t s . M a ny ha d
hope d t h e c r e a t i on of t he e ur o w oul d f or c e os s i f i e d c ount r i e s l i ke I t a l y t o
c ha nge t he i r w a ys . L os i ng t he a bi l i t y t o de va l ue m e a nt t ha t
c om pe t i t i ve ne s s c oul d be r e c ove r e d onl y by “ i nt e r na l de va l ua t i on” ( t ha t i s ,
br i ngi ng dow n w a ge s a nd pr i c e s r e l a t i ve t o ot he r s ) , boos t i ng pr oduc t i vi t y ,
or b ot h. T hi s m e a nt l i be r a l i s i ng l a bour a nd pr oduc t m a r ke t s , a nd
pr om ot i ng c om pe t i t i on. B ut f or c ount r i e s us e d t o hi gh i nf l a t i on a nd hi gh
i nt e r e s t r a t e s be f or e t he l a unc h of t he e ur o, a ny l os s of c om pe t i t i ve ne s s
c oul d be m a s ke d f or a l ong t i m e by c he a pe r m one y .

B y a bou t 2005 i t w a s a ppa r e nt t ha t na t i ona l e c onom i e s , f a r f r om
c onve r gi ng a s t he y ha d be e n e xpe c t e d t o do, w e r e pul l i ng a pa r t . T he
di f f e r e nc e s w e r e no gr e a t e r t ha n t he di s pe r s i on i n gr ow t h r a t e s i n
A m e r i c a n s t a t e s , but t he y w e r e w or r yi ngl y pe r s i s t e nt . S om e w e r e gr ow i ng
f a s t w i t h hi gh i nf l a t i on, a m ong t he m I r e l a nd, G r e e c e a nd S pa i n. A l l w e r e
e nj oyi ng a boom f ue l l e d by l o w i nt e r e s t r a t e s . A t t he ot he r e nd of t he
s pe c t r um , m i gh t y G e r m a ny w a s gr ow i ng a na e m i c a l l y , but w i t h ve r y l ow
i nf l a t i on. T o s om e e xt e nt t he E C B ’ s one – s i z e – f i t s – a l l i nt e r e s t r a t e
e xa c e r ba t e d t hi s pol a r i s a t i on: i nt e r e s t r a t e s w e r e t oo l ow f or ove r he a t i ng
c ount r i e s , but t oo hi gh f or G e r m a ny ( t he s i t ua t i on i s r e ve r s e d t oda y) . T he
t w o oddi t i e s w e r e I t a l y a nd P or t uga l , w hi c h s e e m e d t o be s uf f e r i ng t he
w or s t of bot h w or l ds w i t h, s i m ul t a ne ous l y , s l ow gr ow t h a nd h i ghe r – t ha n-
a ve r a ge i nf l a t i on ( s e e F i gur e 4.1 ) .
FIG 4.1 F r o m h a r e s t o t o r t o i s e s
GDP, 1999–2014, 1999 = 100
*Forecast
S o u r c e : Eurostat
T he r e w e r e , i nde e d, m a r ke d di f f e r e nc e s a m ong bot h t he ha r e s a nd t he
t or t oi s e s . A m ong t he f a s t – gr ow i ng c ount r i e s , G r e e c e ha d a gove r nm e nt
t ha t w a s s pe ndi ng r e c kl e s s l y a nd f i ddl i ng s t a t i s t i c s , w he r e a s S pa i n a nd
I r e l a nd ha d publ i c f i na nc e s s e e m i ngl y i n good or de r , but pr i v a t e s e c t or s
t ha t w e r e r unni ng up hi gh de bt a s a s i de – e f f e c t of hous i ng boom s . T oo f e w

que s t i one d w he t he r buoya nt t a x r e ve nue s m i ght not j us t be a w i ndf a l l f r om
a pr ope r t y bubb l e . W he n i t bur s t , t he y w oul d c ol l a ps e a nd s pe ndi ng w oul d
s hoot up t o pa y f or une m pl oye d c ons t r uc t i on w or ke r s . I r e l a nd’ s ne t e xpor t s
w e r e boom i ng e ve n a s i t w a s ove r he a t i ng, but S pa i n’ s w e r e s hr i nki ng.
O ve r t w o de c a d e s , I r e l a nd ha d g one f r om be i ng t he poor e s t E U c ount r y t o
be i ng one of t he r i c he s t . B ut w hi l e t he C e l t i c T i ge r put on r e a l m us c l e i n
t he e a r l y ye a r s , boos t i ng pr oduc t i vi t y by t ur ni ng i t s e l f i nt o a n e xpor t ba s e
f or m ul t i na t i ona l s , l a t e r i t j us t gor ge d i t s e l f on c he a p c r e di t .
A m ong t he l a gga r ds , G e r m a ny’ s s i c kl i ne s s m a s ke d a pr oc e s s of
pr ot r a c t e d r e f or m , e s pe c i a l l y G e r ha r d S c hr öde r ’ s A ge nda 2010 l a bour –
m a r ke t a nd w e l f a r e c ha nge s , pus he d t hr ough a f t e r 2003. G e r m a ny w a s s t i l l
di ge s t i ng t he c os t of a bs or bi ng t he f or m e r E a s t G e r m a ny , a nd ha d e nt e r e d
t he e ur o w i t h a n ove r va l ue d c ur r e nc y . B ut i n a c ount r y a c c us t om e d t o
l i vi ng w i t h a ha r d c ur r e nc y a nd l ow i nf l a t i on, a nd r e l a t i ve l y c ons e ns ua l
i ndus t r i a l r e l a t i o ns , G e r m a n bos s e s a nd w or ke r s s e t of f on t he l ong s l og of
w a ge r e s t r a i nt t o r e ga i n c om pe t i t i ve ne s s . I nt e r na l de m a nd w a s s o w e a k
t ha t a l m os t a l l G e r m a ny’ s gr ow t h c a m e f r om i nc r e a s i ng e xpor t s . B ut i n
I t a l y a n d P or t uga l s l ow gr ow t h w a s a n unm i s t a ka bl e s i gna l of r e f or m
pa r a l ys i s . B ot h w e r e l os i ng e xpor t s ha r e . H i ghe r i nf l a t i on w a s pus hi ng up
w a ge s , w hi l e pr oduc t i vi t y w a s s t a gna nt . I t a l y ha d hi ghe r de bt t ha n
P or t uga l , but P or t uga l w a s r unni ng hi ghe r budge t de f i c i t s .
O ne c a us e of t h e pr obl e m w a s t ha t s out he r n E ur ope a n c ount r i e s w e r e
hi t ha r de r t ha n nor t he r n one s by C hi na ’ s e nt r y i nt o t he W or l d T r a de
O r ga ni s a t i on a t t he e nd of 2001 . C hi na ’ s e xpor t s of t e xt i l e s , c l ot hi ng a nd
f oot w e a r gr e w s ha r pl y; t hos e of I t a l y a nd P or t uga l de c l i ne d m a r ke dl y .
A not he r i s s ue w a s t ha t f or e i gn di r e c t i nve s t m e nt ha d s hi f t e d f r om t he
M e di t e r r a ne a n c ount r i e s t o t he ne w c ount r i e s f r om c e nt r a l a nd e a s t e r n
E ur ope w hi c h j oi ne d t he E U i n 2004. T he r e c he a p s ki l l e d l a bour w a s
pl e nt i f ul . G e r m a ny m a de f ul l us e of t he oppor t uni t y by s hi f t i ng f a c t or y
pr oduc t i on e a s t w a r d. B ut F r a nc e , a m ong ot he r s , r e s i s t e d. R a t he r i t
r e ga r de d l ow – c os t , l ow – t a x e a s t e r n E ur ope r e s e nt f ul l y a s a s our c e of
c om pe t i t i on a nd “ s oc i a l dum pi n g” . A c c or di ng t o t he W or l d B a nk, w hi c h i n
2012 pr oduc e d a de t a i l e d r e por t on E ur ope ’ s e c onom i c m ode l ,1 a not he r
dr a w ba c k i n s out he r n E ur ope w a s t ha t m a ny of i t s s m a l l f a m i l y- r un
bus i ne s s e s w e r e uns ui t e d t o c om pe t i ng i n a bi g E ur ope a n m a r ke t .

T he s t r i ki ng nor t h- s out h di vi de t ha t ha s e m e r ge d i n E ur ope m a y ha ve
e ve n m or e pr of ound hi s t or i c a l a nd s oc i ol ogi c a l r oot s . M a n y c i t e M a x
W e be r ’ s P r ot e s t a nt w or k e t hi c . O t he r s s pe a k of C a t hol i c s ’ gr e a t e r
r e a di ne s s t o a bs ol ve s i ns . W he n gi vi ng l e c t ur e s , V í t or C ons t â nc i o, vi c e –
pr e s i de nt of t he E C B a nd a f o r m e r e c onom i c s pr of e s s or f r om P or t uga l ,
w oul d s om e t i m e s hol d up a c ol our – c ode d m a p of E ur ope a nd a s k
a udi e nc e s w ha t t he da r ke r c ol o ur s i n t he nor t h a nd l i ght e r s ha de s i n t he
s out h m i ght r e p r e s e nt . T he us ua l r e pl y w a s G D P pe r he a d. I n f a c t , t he y
de not e d l i t e r a c y r a t e s i n t he 19t h c e nt ur y , w i t h bi bl e – r e a di ng nor t he r n
P r ot e s t a nt s m or e l i t e r a t e t ha n t he pr i e s t – dom i na t e d s out he r n C a t hol i c s .
P l a i nl y de bt a nd de f i c i t s a r e not t he onl y or e ve n t he be s t m e a s ur e of
e c onom i c he a l t h. T he t r e nd i n uni t l a bour c os t s ( f l a t i n G e r m a ny but r i s i ng
f a s t i n t he pe r i p he r y) a nd c ur r e nt – a c c ount ba l a nc e s ( s ur pl us e s i n G e r m a ny
a nd de f i c i t s i n t he pe r i phe r y) i s c r uc i a l .
S om e of t he e ur o z one ’ s pr obl e m s m i ght ha ve be e n a l l e vi a t e d by
r e f or m s , bot h na t i ona l a nd E ur ope a n, t o m a ke w a ge s a nd pr i c e s m or e
r e s pons i ve . B ut a l ong w i t h r e f or m f a t i gue i n m e m be r c ount r i e s , t he r e w a s
a l s o i nt e gr a t i on f a t i gue a c r os s t he E U . D e e pe ni ng t he s i ngl e m a r ke t m i ght
ha ve pr ovi de d a s our c e of gr ow t h a nd c om pe t i t i ve i m pul s e . M uc h of t he
E U ’ s pr oduc t i vi t y l a g, i n c om pa r i s on w i t h t he U ni t e d S t a t e s , i s due t o
unde r pe r f or m i ng s e r vi c e s . B ut t he E U ’ s s e r vi c e s di r e c t i ve , de s i gne d t o
br e a k dow n s om e of t he ba r r i e r s , w a s w a t e r e d dow n a f t e r t he de f e a t of t he
c ons t i t ut i ona l t r e a t y i n r e f e r e n dum s i n F r a nc e a nd t he N e t he r l a nds i n
2005. O ne r e a s on w a s t he pa ni c i n F r a nc e ove r t he s uppos e d t hr e a t of t he
“ P ol i s h pl um be r ” . S oon a f t e r w a r ds R obe r t o M a r oni , a n I t a l i a n m i ni s t e r
f r om t he N or t he r n L e a gue , c a us e d a s t i r by e xc or i a t i ng t he e ur o f or I t a l y’ s
poor pe r f or m a nc e a nd c a l l i ng f or a r e t ur n t o t he l i r a .
S l ow gr ow t h, e c onom i c di ve r ge nc e a nd pol i t i c a l t e ns i on l e d s om e
e c onom i s t s t o s t a r t a s ki ng a s e a r l y a s 2006 w he t he r t he e ur o m i ght br e a k
a pa r t . D a ni e l G r os of t he C e nt r e f or E ur ope a n P ol i c y S t udi e s , a t hi nk- t a nk
i n B r us s e l s , t hought t ha t s l uggi s h G e r m a ny a nd r oa r i ng S pa i n w oul d s oon
s w a p pl a c e s ( he a l s o w or r i e d a b out I t a l y) .2 S i m on T i l f or d o f t he C e nt r e f or
E ur ope a n R e f or m i n L ondon pa i nt e d a s c e na r i o i n w hi c h m a r ke t s m i ght
l os e c onf i de nc e i n I t a l y , w i t h i t s s l ow gr ow t h a nd r e l uc t a nc e t o r e f or m ,

pus hi ng up i t s b or r ow i ng c os t s a nd de bt , i n t ur n pr om pt i ng de m a nds t ha t
I t a l y l e a ve t he e ur o.3
B a n k i n g o n t h e e u r o
T he l a unc h of t h e e ur o gr e a t l y i nc r e a s e d f i na nc i a l i nt e gr a t i on. O f t e n ba nks
gr e w l a r ge i n c om pa r i s on t o t he i r hom e c ount r i e s ’ G D P , a nd i n c om pa r i s on
t o ba nks i n t he U ni t e d S t a t e s , i n pa r t be c a us e E ur ope a n f i r m s r e l i e d m or e
he a vi l y on ba nk l oa ns t ha n on t he c or por a t e – bond m a r ke t . B ut i t w a s a
l ops i de d s or t of i nt e gr a t i on. C r os s – bor de r l e ndi ng t o ba nks a nd s ove r e i gns
gr e w f a s t , but r e t a i l l e ndi ng r e m a i ne d B a l ka ni s e d i n na t i ona l m a r ke t s .
C r os s – bor de r ow ne r s hi p of ba nks gr e w onl y s l ow l y . M e r ge r s a nd
a c qui s i t i ons t e nde d t o ha ppe n w i t hi n a c ount r y’ s bor de r s , a s i g n of s t r ong
e c onom i c na t i ona l i s m i n t he ba nki ng s e c t or .
C r os s – bor de r ow ne r s hi p w a s m os t a ppa r e nt i n t he E U ’ s ne w m e m be r s
f r om c e nt r a l a nd e a s t e r n E ur ope . A m ong m e m be r s of “ ol d” E ur ope i t
r e m a i ne d f or t he m os t pa r t t i ny . B ut by l a t e 2007, pa r t l y a s a r e s ul t of t he
C om m i s s i on’ s e f f or t s t o c hi p a w a y a t i nt e r na l ba r r i e r s , t he r e w a s e nough
c r os s – bor de r e xpa ns i on t o pr om pt a t l e a s t one e c onom i s t , N i c ol a s V é r on,
t o publ i s h a pa p e r f or t he B r ue g e l t hi nk- t a nk i n B r us s e l s t i t l e d: I s E ur ope
R e ady f or a M a j or B ank i ng C r i s i s ?4 H e not e d t ha t ba nks ha d be c om e t oo
l a r ge a n d di ve r s i f i e d f or na t i ona l s upe r vi s or s , e ve n i f t he y m e t i n t he t he n
C om m i t t e e of E ur ope a n B a nki ng S upe r vi s or s ( C E B S ) , t o ove r s e e pr ope r l y .
H e s a i d:
T he pr ude nt i al f r am e w or k f or pan- E ur ope an bank s has be c om e a m az e
of nat i onal aut hor i t i e s ( 51 ar e m e m be r s of C E B S al one ) , E U – l e v e l
c om m i t t e e s ( no f e w e r t han ni ne ) and bi l at e r al ar r ange m e nt s ( s om e 80
r e c e nt l y m e nt i one d by E ur ope an C om m i s s i one r C har l i e M c C r e e v y ) .
I n a n e a r l y hi nt a t t he f ut ur e “ ba nki ng uni on” t ha t w oul d e m e r ge f i ve ye a r s
l a t e r , V é r on a r gue d t ha t t he l a r ge s t c r os s – bor de r ba nks ( i nc l udi ng B r i t i s h
one s , gi ve n L ondon’ s l a r ge f i n a nc i a l c e nt r e ) s houl d be s upe r vi s e d by a n
E U – l e ve l body , w i t h a s i ngl e s e t of r ul e s t o de a l w i t h f a i l i ng ba nks a nd a
ha r m oni s e d de pos i t – i ns ur a nc e s ys t e m .

F i na nc i a l i nt e gr a t i on, i t w a s w i de l y hope d, w oul d s t i m ul a t e a m or e
e f f i c i e nt a l l oc a t i on of c a pi t a l a c r os s t he E U . A nd i n t he e ur o z one , i t w a s
s uppos e d t o pr ovi de a m e a ns of a bs or bi ng c ount r y- s pe c i f i c s hoc ks gi ve n
t he l a c k of a dj us t m e nt t ool s . B ut w he n c r i s i s s t r uc k, f i na nc i a l i nt e gr a t i on
pr ovi de d a n ope n c ha nne l f or f i na nc i a l c ont a gi on t o s pr e a d. T he f a c t t ha t
ba nks w e r e l a r ge , a nd t ha t t he i r bond hol di ngs w e r e s t r ongl y bi a s e d i n
f a vour of t he i r ow n s ove r e i gn’ s de bt , he l pe d c r e a t e a de a dl y f e e dba c k l oop
be t w e e n w e a k s ove r e i gns a nd w e a k ba nks . A nd be c a us e m os t of t he ba nks ’
c r os s – bor de r a s s e t s w e r e i n t he f or m of l e ndi ng, r a t he r t ha n e qui t y , t he
i nt e r na t i ona l f l ow s t ha t ha d f i na nc e d e ur o- z one i m ba l a nc e s c oul d m or e
e a s i l y be c ut of f w he n c r e di t be c a m e s c a r c e .
R e s o u n d i n g c o m p l a c e n c y
M os t or a l l of t he s e pr obl e m s w e r e r e a s ona bl y w e l l unde r s t ood a nd,
i nde e d, pr e di c t e d be f or e t he l a u nc h of t he e ur o. I n t he C om m i s s i on’ s book
on t he e ur o, E M U @ 10,5 publ i s he d i n 2008 j us t a he a d of t he t e nt h
a nni ve r s a r y of t he s t a r t of t he m one t a r y uni on, t he r e i s m e nt i on of w or r i e s
a bout i m ba l a nc e s , t he di ve r ge nc e of e c onom i e s a nd t he da nge r s l ur ki ng i n
t he b a nki ng s ys t e m . B ut now he r e i n i t s 320 t ur gi d pa ge s di d i t i s s ue a c l e a r
w a r ni ng, of t he s or t t ha t s om e i n de pe nde nt e c onom i s t s w e r e vo i c i ng, a bout
t he r i s ks of a s e l f – f ul f i l l i ng m a r ke t pa ni c , or of a de s t r uc t i ve doom – l oop
be t w e e n ba nks a nd s ove r e i gns , or of l a r ge c ont i nge nt l i a bi l i t i e s i n ba nks
e ndi ng u p on t he books of a l r e a dy ove r i nde bt e d s ove r e i gns . T he c l e a r e s t
m e s s a ge w a s one of s e l f – c ongr a t ul a t i on ove r t he “ r e s oundi ng s uc c e s s ” of
t he e ur o. I t ha d boos t e d e c onom i c s t a bi l i t y , c r os s – bor de r t r a d e , f i na nc i a l
i nt e gr a t i on a nd i nve s t m e nt , de c l a r e d t he a ut hor s . T r a um a t i c e x c ha nge – r a t e
c r i s e s w e r e a t hi ng of t he pa s t , a nd f i s c a l s t a bi l i t y ha d be e n e nha nc e d.
I nde e d, t he e ur o ha d be c om e “ a pol e of s t a bi l i t y f or E ur ope a nd t he w or l d
e c onom y” . T he e ur o ha vi ng s ur vi ve d a de c a de , a nd r e ga i ne d i t s s t r e ngt h
a ga i ns t t he dol l a r , i t w a s pe r ha ps na t ur a l f or E ur ope a n of f i c i a l s t o boa s t of
i t s a c hi e ve m e nt s a nd di s m i s s t he doom s a ye r s , pa r t i c ul a r l y t hos e f r om t he
E ngl i s h- s pe a ki ng w or l d.
A m uc h de e pe r m ys t e r y i s t he c om pl a c e nc y of f i na nc i a l m a r ke t s . T he y
ut t e r l y f a i l e d t o di s t i ngui s h be t w e e n t he dodgy c r e di t of G r e e c e a nd t he
r oc k- s ol i d de pe nda bi l i t y of G e r m a ny . T he yi e l d on gove r nm e nt bonds

( w hi c h m ove s i nve r s e l y t o pr i c e ) f e l l i n pe r i phe r a l c ount r i e s i n t he e a r l y
ye a r s of t he e ur o s o t ha t i t be c a m e a l m os t i de nt i c a l a c r os s t he e ur o z one .
I t a l y s om e t i m e s ha d t o pa y s i x pe r c e nt a ge poi nt s m or e t ha n G e r m a ny i n
i nt e r e s t t o bor r ow m one y i n t he 1990s . B y 2007, t hi s “ s pr e a d” ha d f a l l e n t o
a f r a c t i on of a pe r c e nt a ge poi nt ( a bout 20 ba s i s poi nt s ) . G e t t i ng m a r ke t s t o
i m pos e di s c i pl i ne on gove r nm e nt s ha d be e n one r e a s on f or e ns hr i ni ng t he
no- ba i l – out r ul e a nd f or bi ddi ng t he E C B f r om m one t i s i ng gove r nm e nt
de bt .
P e r ha ps i nve s t or s w e r e s i m pl y c ha s i ng a nyt hi ng t ha t of f e r e d a
m a r gi na l l y be t t e r yi e l d. M a r ke t s of t e n ove r s hoot i n bot h di r e c t i ons , a f t e r
a l l . S om e w e r e s t i l l c onvi nc e d t he e ur o w oul d l e a d t o c onve r ge nc e a m ong
E ur ope a n e c ono m i e s . O t he r s a s s um e d t ha t de f a ul t w i t hi n t he e ur o z one
w a s unt hi nka bl e : w ha t e ve r t he t r e a t i e s s a i d, s ol i da r i t y a m ong m e m be r s
w oul d p r e va i l , o ne w a y or a not he r . I n hi s 1989 r e por t on s e t t i ng up a s i ngl e
c ur r e nc y , J a c que s D e l or s hi m s e l f ha d a r gue d t ha t , f a r f r om pe na l i s i ng
i m ba l a nc e s , f i na nc i a l m a r ke t s m i ght f or a w hi l e f i na nc e t he m be c a us e of
t he a t t r a c t i on of a l a r ge pool of e ur o- de nom i na t e d de bt :6
R at he r t han l e adi ng t o gr adual adapt at i on of bor r ow i ng c os t s , m ar k e t
v i e w s about t he c r e di t w or t hi ne s s of of f i c i al bor r ow e r s t e nd t o c hange
abr upt l y and r e s ul t i n t he c l os ur e of ac c e s s t o m ar k e t f i nanc i ng.
A s F i gur e 4.2 s h ow s , bond yi e l ds of c ount r i e s i n t he e ur o z one be t w e e n
1990 a nd 2010 t hus c a m e t o l oo k l i ke a l e ngt h of r ope f r a ye d a t bot h e nds .
B e f or e E M U yi e l ds w e r e s pr e a d f a r a pa r t , r e f l e c t i ng t he m a r ke t ’ s
pe r c e pt i on of e a c h c ount r y’ s r i s k of i nf l a t i on, de va l ua t i on a nd de f a ul t .
T he y t he n na r r ow e d a s t he l a u nc h of E M U a ppr oa c he d be f or e be c om i ng
c l os e l y e nt w i ne d t hr ough t he f i r s t de c a de of t he e ur o. T he n, w i t h t he ons e t
of t he e ur o c r i s i s i n l a t e 2008, t he y s pr e a d out onc e m or e a s m a r ke t s
s udde nl y s t a r t e d t o w or r y a bout t he r i s k of de f a ul t . G r e e c e a nd I r e l a nd
w e r e t o be t he f i r s t s t r a nds t o c om e l oos e .

FIG 4.2 U n b o n d e d
Ten-year bond yields, 1995–2010, %
S o u r c e : Eurostat

5 T r i c h e t ’ s t e s t
OF THE SENIOR FIGURES IN THE EURO ZONE , i t w a s J e a n- C l a ude T r i c he t ,
pr e s i de nt of t he E ur ope a n C e nt r a l B a nk, w ho ga ve t he c l e a r e s t w a r ni ngs of
t he da n ge r of gr ow i ng de f i c i t s . H e w a s a ha w k a bout r e s pe c t i ng t he
s t a bi l i t y a nd gr ow t h pa c t . M or e ove r , f r om 2005, he w oul d t ur n up e ve r y
m ont h a t m i ni s t e r i a l m e e t i ngs w i t h c ha r t s s e t t i ng out hi s c onc e r ns a bout
e c onom i c i m ba l a nc e s . A f a vo ur i t e one s how e d t he di ve r ge nc e i n uni t
l a bour c os t s a c r os s t he e ur o z one . A not he r t r a c ke d t he gi ddy r i s e of publ i c –
s e c t or w a ge s . H i s m a i n c onc e r n w a s t ha t t he l os s of c om pe t i t i ve ne s s w oul d
ha r m gr ow t h. B ut he a l s o kne w t he e ur o z one w a s not a f e de r a l c ount r y;
t he r e w a s no c e nt r a l budge t t o he l p c ount r i e s t ha t got i nt o t r oubl e . T he
c ount r i e s of t he e ur o z one , he w oul d s a y , w e r e l i ke L a C i gal e e t l a F our m i ,
J e a n de l a F ont a i ne ’ s f a bl e a bout t he i m pr ovi de nt c i c a da a n d t he ha r d-
w or ki ng a nt . T hos e i n t he pe r i phe r y s a ng i n t he w a r m s uns hi ne , w hi l e t he
i ndus t r i ous G e r m a ns he l d dow n t he i r w a ge s a nd put m one y a s i de f or a
r a i ny da y . B ut w he n w i nt e r c a m e , T r i c he t c oul d s c a r c e l y s t a nd a s i de .
C e nt r a l ba nks w i e l d t he pow e r of f i na nc i a l a l c he m y , a bl e t o pr oduc e a n
e ndl e s s qua nt i t y of m one y out of t hi n a i r . O f t e n onl y t he E C B ha d t he
m e a ns t o pr ovi de t he va s t a m o unt s of l i qui di t y ne e de d t o s t o p a r un on
s ound ba nks , or on s ol ve nt s ove r e i gns .
T he E C B ’ s t r e a t y- pr e s c r i be d i nde pe nde nc e gi ve s i t a pe c ul i a r l y r e m ot e ,
O l ym pi a n s t a t u s . I n publ i c , t he di a l ogue be t w e e n gove r nm e nt s a nd t he
c e nt r a l b a nk i s de t a c he d a nd r e v e r e nt i a l . G ove r nm e nt s a r e f r ow ne d upon i f
t he y de m a nd a c t i on f r om t he E C B t oo ve he m e nt l y i n publ i c . B e hi nd t he
s c e ne s , t he E C B ha s be e n a n i n t e ns e l y pol i t i c a l a c t or , f r om de s i gni ng a nd

m oni t or i ng ba i l – out pr ogr a m m e s t o e nga gi ng i n ha nd- t o- ha nd c om ba t w i t h
l e a de r s ove r r e f or m s . T he G a l l i c r ow s be t w e e n T r i c he t a nd t he F r e nc h
pr e s i de nt , N i c ol a s S a r koz y , be c a m e l e ge nda r y . O f t he E C B ’ s c om pone nt
ba nks , G e r m a n y’ s B unde s ba nk i s t he m os t i m por t a nt a nd pur e i n i t s
c onvi c t i on t ha t i t i s not t he j ob of c e nt r a l ba nke r s t o ge t pol i t i c i a ns out of
f i s c a l t r oubl e . I t s pr e s i de nt , J e n s W e i dm a nn, be l i e ve s t he E C B s houl d a c t
l i ke O dys s e us be f or e t he s i r e ns : l a s h i t s e l f t o t he m a s t w i t h s t r i c t r ul e s a nd
t e l l t he s a i l or s t o s t uf f t he i r e a r s w i t h w a x t o s hut out t he pol i t i c i a ns ’ c a l l s .
T hi s i s t he ba c kdr op t o t he c r i s i s a s i t de ve l ope d f r om 2007.
Chacun sa merde
A s g l oba l c r e di t dr i e d up a f t e r t he c ol l a ps e of s ubpr i m e m or t ga ge s i n t he
U ni t e d S t a t e s , t he E C B w a s t he f i r s t t o ope n t he c a s h t a p on A ugus t 9t h
2007, m a ki ng a n e xt r a €95 bi l l i on a va i l a bl e t o ba nks , s oon f ol l ow e d by t he
c e nt r a l ba nks of t he U ni t e d S t a t e s , C a na da , J a pa n a nd A us t r a l i a . T he
t r i gge r w a s t he a nnounc e m e nt t ha t B N P P a r i ba s , a F r e nc h ba nk, w a s
s us pe ndi ng w i t hdr a w a l s f r om t w o f unds he a vi l y e xpos e d t o s ubpr i m e
c r e di t . I t s a i d a s hor t a ge of l i qu i di t y m a de t he a s s e t s i m pos s i bl e t o va l ue .
A ny dou bt s t ha t E ur ope w oul d f e e l t he f or c e of t he f i na nc i a l c r i s i s w e r e
qui c kl y di s pe l l e d. A f e w da ys e a r l i e r I K B , a G e r m a n ba nk t ha t ha d pl a ye d
r e c kl e s s l y w i t h a s s e t – ba c ke d i nve s t m e nt s , ha d be e n ba i l e d out ; a m ont h
l a t e r t he r e w a s a r un on N or t he r n R oc k, a B r i t i s h l e nde r t ha t w oul d
e ve nt ua l l y be na t i ona l i s e d. T r i c he t ’ s qui c k a nd f i r m r e s pons e pr om pt e d t he
F i nanc i al T i m e s t o pi c k hi m i n D e c e m be r 2007 a s i t s “ P e r s on of t he Y e a r ” .
I t w a s t he ba nk r upt c y of L e hm a n B r ot he r s on S e pt e m be r 15t h 2008
t ha t r e a l l y c a us e d gl oba l pa ni c . T he de c i s i on by I r e l a nd a f or t ni ght l a t e r t o
e xt e nd a n unl i m i t e d gua r a nt e e t o a l l ba nki ng de bt pr ovoke d bot h a nge r a t a
r a s h m ove t ha t w a s s uc ki ng de pos i t s f r om t he r e s t of E ur ope a nd a
s c r a m bl e by ot he r c ount r i e s t o i s s ue t he i r ow n gua r a nt e e s . S a r koz y , w hos e
c ount r y he l d t he r ot a t i ng pr e s i d e nc y of t he E U , s ought t o c ont r ol t he f r e e –
f or – a l l by c a l l i ng a s um m i t of l e a de r s of t he f our bi gge s t E ur ope a n
e c onom i e s on O c t obe r 4t h. H e pus he d f or t he c r e a t i on of a c om m on
E ur ope a n ba nk- r e s c ue f und, w or t h pe r ha ps €300 bi l l i on, but w a s s l a ppe d
dow n by A nge l a M e r ke l , t he G e r m a n c ha nc e l l or . “ E l l e a di t , c hac un s a
m e r de ” ( “ s he s a i d e ve r ybody s houl d de a l w i t h hi s ow n s hi t ” ) w a s how

S a r koz y s c a t hi ngl y r e c ount e d t he c onve r s a t i on t o hi s a i de s . A t a not he r
s um m i t i n P a r i s e i ght da ys l a t e r , t hi s t i m e of a l l e ur o- z one l e a de r s pl us t he
U K ’ s pr i m e m i ni s t e r , G or don B r ow n, M e r ke l c ha nge d he r t une . H e r m i nd
c onc e nt r a t e d by t he c ol l a ps e be t w e e n t he t w o s um m i t s of H ypo R e a l
E s t a t e , s he now a c c e pt e d t he n e e d f or a m a s s i ve E ur ope a n r e s pons e . I t
w oul d b e w or t h €1.9 t r i l l i on i n l oa n gua r a nt e e s a nd c a pi t a l i nj e c t i ons t o
pr op up t he ba nks . T he m ove w a s c o- or di na t e d a nd s ubj e c t t o E U s t a t e – a i d
r ul e s , but e a c h c ount r y w oul d s t i l l ha ve t o c l e a n up i t s ow n ba nki ng m e s s .
T he hype r a c t i ve S a r koz y t he n f l e w of f t o C a m p D a vi d ( t a ki n g a l ong t he
pr e s i de nt of t he E ur ope a n C om m i s s i on, J os é M a nue l B a r r os o) t o pe r s ua de
P r e s i de nt G e or g e B us h t o c a l l a gl oba l s um m i t on t he f i na nc i a l c r i s i s ( i t
w oul d be c om e t he G 20 s um m i t ) .
U nde r t he I r i s h s i ngl e – m a r ke t c om m i s s i one r , C ha r l i e M c C r e e vy , t he
C om m i s s i on ha d hi t he r t o f a vour e d l i ght – t ouc h r e gul a t i on of f i na nc e . B ut
i n O c t ob e r B a r r os o e nl i s t e d a f or m e r I M F bos s a nd F r e nc h c e nt r a l – ba nk
gove r nor , J a c qu e s de L a r os i è r e , t o pr oduc e a r e por t on how t o t i ght e n
c ont r ol ove r t he f i na nc i a l s e c t or . I t w a s de l i ve r e d w i t hi n t hr e e m ont hs .
A f t e r m uc h r e s i s t a nc e f r om t he U K , t he r e por t w oul d l e a d t o t he c r e a t i on
i n 2011 of f our ne w E ur ope a n f i na nc i a l s upe r vi s or y bodi e s : t hr e e ne w
r e gul a t or s f or ba nks , i ns ur a nc e a nd m a r ke t s , a nd t he E ur ope a n S ys t e m i c
R i s k B o a r d t o m oni t or t hr e a t s t o t he ove r a l l f i na nc i a l s ys t e m . T he t a s k
w oul d b e pur s ue d w i t h z e a l a f t e r 2010 by M c C r e e vy’ s F r e nc h s uc c e s s or ,
M i c he l B a r ni e r , w ho vow e d t ha t no a s pe c t of f i na nc e w o ul d e s c a pe
r e gul a t i on.
S oon a f t e r L e hm a n’ s de m i s e , s t a f f a t t he I M F ’ s E ur ope a n de p a r t m e nt
pr e di c t e d t ha t “ i t ’ s goi ng t o r a i n pr ogr a m m e s ” . T he f i r s t c a m e i n t he f or m
of a c l a s s i c ba l a nc e – of – pa ym e nt s c r i s i s t ha t hi t t he ne w e r , f a s t – gr ow i ng
e a s t e r n E U m e m be r s t ha t w e r e out s i de t he e ur o. A s f or e i gn m one y f l e d
a nd c ur r e nc i e s c a m e unde r pr e s s ur e , H unga r y a nd t he n L a t vi a a ppl i e d f or
I M F ba i l – out s i n O c t obe r a nd D e c e m be r 2008, r e s pe c t i ve l y . R om a ni a
f ol l ow e d i n M a r c h 2009. T he s e ba i l – out s w e r e c o- f i na nc e d by t he E U , t he
W or l d B a nk a nd ot he r s . T he e a s t e r n t ur m oi l f e d t he i l l us i on t h a t t he e ur o
ha d br ought pr ot e c t i on f r om t he w or s t of t he c r i s i s . T r i c he t c a l l e d t he
s i ngl e c ur r e nc y “ a s hi e l d” a ga i ns t gl oba l t ur bul e nc e . S l ova ki a w a s m or e
t ha n gl a d t o be a bl e t o s l i p i nt o t he s i ngl e c ur r e nc y on J a nua r y 1 s t 2009. T o

t he f ur y of s om e , t he e ur o z one r e s i s t e d pr e s s ur e t o s of t e n i t s a dm i s s i on
c r i t e r i a s o t ha t ot he r s c oul d f ol l ow .
B ut t he c om bi ne d i m pa c t of ba n k r e s c ue s , f i s c a l s t i m ul us a nd t he s t a r t
of r e c e s s i on a ggr a va t e d t he pub l i c f i na nc e s of s e ve r a l c ount r i e s . M i ght t he
c r i s i s s pr e a d t o t he e ur o z one a f t e r a l l ? I r e l a nd a nd C ypr us w e r e l i ke l y
c a ndi da t e s f or a s s i s t a nc e be c a u s e of t he i r out s i z e d ba nki ng s e c t or s . S pa i n
l ooke d f r a gi l e be c a us e of i t s pr ope r t y bus t . O t he r s t hought t ha t A us t r i a
w a s vul ne r a bl e be c a us e of i t s ba nks ’ e xpos ur e t o c e nt r a l a nd e a s t e r n
E ur ope . H ow e ve r , t he f i r s t e ur o- z one de bt c r i s i s w oul d be gi n i n a c ount r y
w hos e ba nks w e r e r e a s ona bl y s ound, but w hos e publ i c s pe ndi ng ha d r un
out of c ont r ol a nd w hos e s t a t i s t i c s w e r e dodgy: G r e e c e .
G r e e k t r a g e d y
O ddl y , p e r ha ps , t he f i r s t bl ow t o G r e e k de bt w a s not f i na nc i a l but pol i t i c a l .
T he de a t h of a 15- ye a r – ol d s c hool boy , s hot by t he pol i c e i n D e c e m be r
2008, s e t of f a f or t ni ght of r i ot s a c r os s t he c ount r y . E ve n f or pe opl e us e d t o
a de gr e e of r i t ua l i s e d s t r e e t c l a s he s , t he s c a l e of t he unr e s t w a s
unpr e c e de nt e d s i nc e t he r e s t or a t i on of de m oc r a c y i n 1974. T he vi ol e nc e
s e e m e d t o r e f l e c t a de e p m a l a i s e ove r hi gh yout h une m pl oym e nt , a
dyna s t i c pol i t i c a l s ys t e m ba s e d on pa t r ona ge , a kl e pt oc r a t i c a nd
i ne f f e c t i ve publ i c a dm i ni s t r a t i on, e duc a t i ona l r e f or m s – a nd t he publ i c
ba i l – out of ba nks . O t he r E ur ope a n l e a de r s w or r i e d t ha t t he r e be l l i ous ne s s
m i ght s pr e a d ( S a r koz y c a nc e l l e d a pl a nne d s c hool r e f or m , f e a r i ng
“ r e gi c i da l ” m obs ) .
T he t e e t e r i ng G r e e k pr i m e m i ni s t e r , K os t a s K a r a m a nl i s , s a c ke d hi s
f i na nc e m i ni s t e r , G e or ge A l ogos kouf i s , a m ont h l a t e r a nd t he n l oos e ne d
t he publ i c pur s e – s t r i ngs a he a d of a n e l e c t i on. G r e e k bond yi e l ds ha d be e n
dr i f t i ng upw a r d f r om t he s t a r t of t he c r e di t c r unc h i n 2007. B ut w i t h t he
r i ot s t he s pr e a d ove r G e r m a n bo nds bl e w out , r i s i ng f r om a bout 160 t o 300
ba s i s po i nt s i n l a t e J a nua r y 2009, a f t e r S t a nda r d & P oor ’ s ha d dow ngr a de d
G r e e c e ’ s de bt . T he E ur ope a n C om m i s s i on pl a c e d G r e e c e ( a nd f i ve ot he r s )
unde r s ur ve i l l a n c e f or br e a c hi ng t he 3% de f i c i t l i m i t . I t s a i d G r e e c e a nd
I r e l a nd s houl d s t e p up de f i c i t – c ut t i ng.
S e ni or F r e nc h a nd G e r m a n of f i c i a l s he l d s e c r e t m e e t i ngs a bout how t o
r e s pond s houl d G r e e c e l os e a c c e s s t o bond m a r ke t s . B ut t he pr obl e m

s e e m e d t o r e s ol ve i t s e l f , he l pe d by r e a s s ur a nc e s f r om t he G e r m a n f i na nc e
m i ni s t e r , P e e r S t e i nbr üc k, t ha t w e a ke r e ur o- z one m e m be r s w oul d be
he l pe d i f t he y got i nt o t r oubl e . T he c om m e nt s w e r e e c h oe d by t he
C om m i s s i on a nd t he E C B . F or a w hi l e t he uns poke n a s s um pt i on t ha t
c ount r i e s of t he e ur o z one w oul d s t a nd be hi nd e a c h ot he r i n c a s e of t r oubl e
a ppe a r e d t o ha ve be e n r e a f f i r m e d. S pr e a ds na r r ow e d a ga i n . T he n t he
G r e e k S oc i a l i s t oppos i t i on pa r t y , P a s ok, w on a l a nds l i de vi c t or y i n t he
e l e c t i on on O c t obe r 4t h 2009. I t s l e a de r , G e or ge P a pa ndr e ou, s on a nd
gr a nds on of pr e vi ous G r e e k pr i m e m i ni s t e r s , ha d c a m pa i gne d on a pol i c y
of f i s c a l s t i m ul us . H e ha d pr om i s e d a bove – i nf l a t i on pa y r i s e s , i nve s t m e nt
i n gr e e n e ne r gy a nd ot he r s pe ndi ng t o “ ki c k t he e c onom y ba c k i nt o a c t i on
a ga i n” . O ut put w a s a t a s t a nds t i l l be c a us e of a dr op i n s um m e r t our i s m a nd
s hi ppi ng r e ve nue s ha d f a l l e n be c a us e of s hr i nki ng gl oba l t r a de . B ut
P a pa ndr e ou br e e z i l y de c l a r e d t ha t “ t he m one y e xi s t s ” .
I t di dn’ t . O n O c t obe r 16t h, l e s s t ha n a f or t ni ght a f t e r c om i ng t o pow e r ,
P a pa ndr e ou a nnounc e d t ha t t he pr e vi ous gove r nm e nt ha d l e f t a n e nor m ous
hol e i n t he budge t . H i s f i na nc e m i ni s t e r , G e or ge P a pa c ons t a n t i nou, s a i d
t he de f i c i t f or 2010 w oul d be a bove 10% of G D P , a f i gur e pr om pt l y
r e vi s e d up t o 12 .7% . Y e t s ur pr i s i ngl y , f e l l ow E ur ope a n l e a de r s a t f i r s t pa i d
l i t t l e a t t e nt i on t o t hi s ope ni ng a c t of t he G r e e k t r a ge dy . P ol i c y de ba t e
f oc us e d on f i na nc i a l r e gul a t i on, how t o e nd s t i m ul us pr ogr a m m e s a m i d
s i gns of a t e nt a t i ve r e c ove r y a nd t he c onc l us i on of t he l ong s a ga of t he
L i s bon t r e a t y . A n E U s um m i t i n N ove m be r di d not e ve n di s c us s G r e e c e ,
but r a t he r w ho s houl d f i l l t he t w o bi g j obs c r e a t e d by t he t r e a t y: t he
e ve nt ua l c hoi c e s w e r e H e r m a n V a n R om puy a s E ur ope a n C ounc i l
pr e s i de nt a nd C a t he r i ne A s ht on a s f or e i gn- pol i c y c hi e f . M e a nw hi l e , a s
r a t i ngs a ge nc i e s dow ngr a de d G r e e c e , f i na nc e m i ni s t e r s c h a s t i s e d t he
c ount r y . A t a s um m i t i n D e c e m be r P a pa ndr e ou de l i ve r e d a n unus ua l l y
c a ndi d a dm i s s i o n of G r e e k c or r upt i on be f or e f e l l ow l e a de r s . Y e t m a ny s t i l l
hope d t ha t G r e e c e w oul d s om e how ge t i t s e l f out of t r oubl e by t i ght e ni ng
i t s be l t .
S o l v a y d o e s n ’ t s o l v e i t
V a n R om puy’ s i na ugur a l a c t w a s t o c a l l a n i nf or m a l s um m i t a t t he
B i bl i ot hè que S o l va y i n B r us s e l s on F e br ua r y 11t h 2010 t o hol d a ge ne r a l

de ba t e o n t he E U ’ s gr ow t h- pr om ot i on s t r a t e gy . B ut a s G r e e k bond yi e l ds
s pi ke d ove r t he 7% m a r k i n l a t e J a nua r y , he r e a l i s e d s om e t hi ng w oul d
ha ve t o be done , or a t l e a s t s a i d. V a n R om puy ha d l i t t l e i de a how m uc h hi s
pr e s i de nc y w ou l d be dom i na t e d by t he G r e e k c r i s i s . B ut hi s m i l d, s e l f –
de pr e c a t i ng m a n ne r – a nd hi s e xpe r i e nc e a s B e l gi um ’ s budge t m i ni s t e r i n
br i ngi ng dow n hi s c ount r y’ s de bt – m a de hi m a n i de a l ba c kr oom
de a l m a ke r . H e de l a ye d t he s t a r t of t he s um m i t f or m or e t ha n t w o hour s ,
c l os e t i ng hi m s e l f w i t h P a pa ndr e ou, t he l e a de r s of F r a nc e , G e r m a ny , t he
E ur ope a n C om m i s s i on a nd t h e E C B . T he pr e vi ous ye a r F r e nc h a nd
G e r m a n of f i c i a l s ha d s poke n pr i va t e l y of e xt e ndi ng bi l a t e r a l l i ne s of c r e di t
s houl d G r e e c e ge t i nt o t r oubl e , but t he G e r m a n c oa l i t i on ha d s i nc e
c ha nge d a nd t he publ i c m ood w a s hos t i l e t o a ny i de a of l e nd i ng m one y .
G e r m a ns ha d be e n pr om i s e d t he y w oul d ne ve r ha ve t o pa y f or ot he r
c ount r i e s . P e r ve r s e l y , pe r ha ps , i t w a s e a s i e r t o he l p non- e ur o E U c ount r i e s
i n f i na nc i a l t r oubl e t ha n t o l e nd m one y t o t he l i ke s of G r e e c e .
F r om t he out s e t t he di s c us s i on r e f l e c t e d na t i ona l pr e j udi c e s a nd
pe r s ona l t r a i t s t ha t w oul d s ha pe t he s ubs e que nt r e s pons e . T he i m pe r i ous
S a r koz y w a nt e d E ur ope a n l e a de r s t o r e a c t qui c kl y a nd f or c e f ul l y; t he
c a ut i ous M e r ke l w a s i n no r us h t o r e s pond. T he f or m e r t hought t he c r i s i s
w oul d g o a w a y i f gove r nm e nt s j us t put up e nough m one y t o s e e of f t he
s pe c ul a t or s ; t he l a t t e r w a s c onvi nc e d t ha t t he c r i s i s w oul d be a s s ua ge d i f
G r e e c e j us t t ook s e r i ous a c t i on t o c ut i t s de f i c i t a nd r e f or m i t s e c onom y . I n
a c o unt r y t ha t h a d not r un a budge t s ur pl us s i nc e 1974, F r e nc h vot e r s di d
not s ha r e t he s a m e r e s e nt m e nt a s G e r m a n one s ove r G r e e k pr of l i ga c y .
S a r koz y a l s o r e j e c t e d t he i nvol v e m e nt of t he I M F a s a n a f f r ont t o E ur ope .
T r i c he t c onc ur r e d, pe r ha ps a l s o be c a us e he t hought t he I M F w oul d t r y t o
i m pos e c ondi t i ons on t he E C B . B ot h m e n m a y ha ve be e n c ons c i ous t ha t
t he I M F w a s r un by D om i ni que S t r a us s – K a hn, a pot e nt i a l S oc i a l i s t
c ha l l e nge r t o S a r koz y . Y e t a f t e r s ha r i ng t he s e i ni t i a l qua l m s , G e r m a ny
c a m e r ound t o i ns i s t i ng on I M F i nvol ve m e nt t o e ns ur e r i gour .
V a n R om puy pa pe r e d ove r t h e s e di f f e r e nc e s w i t h a s t a t e m e nt t ha t
de c l a r e d s uppor t f or G r e e c e “ t o do w ha t e ve r i s ne c e s s a r y” t o c ur b i t s
de f i c i t , a nd a nnounc e d t ha t t he C om m i s s i on w oul d “ m oni t or ” t he
i m pl e m e nt a t i on of t he pr om i s e d de f i c i t – c ut t i ng, “ dr a w i ng on t he e xpe r t i s e
of t he I M F ” . H e s a i d e ur o- z one m e m be r s “ w i l l t a ke de t e r m i ne d a nd c o-
or di na t e d a c t i on , i f ne e de d, t o s a f e gua r d f i na nc i a l s t a bi l i t y i n t he e ur o a r e a

a s a w hol e ” . B ut t o ge t M e r ke l t o s w a l l ow t he i m pl i c i t c om m i t m e nt t o a
ba i l – out , he a dde d a f i na l s e n t e nc e : “ T he G r e e k gove r nm e nt ha s not
r e que s t e d a ny f i na nc i a l s uppor t .”
I r r a t i o n a l ultima ratio
B y M a r c h e ve r ybody kne w t he r e que s t w oul d c om e . T he “ t r oi ka ” t ha t
w oul d ne got i a t e t he ba i l – out – c ons i s t i ng of t he I M F , t he E ur ope a n
C om m i s s i on a nd t he E C B – w a s bor n a nd m a de a n i ni t i a l s e c r e t vi s i t t o
G r e e c e i n e a r l y M a r c h. A m i d ugl y G e r m a n he a dl i ne s t e l l i ng G r e e ks t o
“ s e l l your i s l a nds ” a nd a m a ga z i ne c ove r de pi c t i ng V e nus de M i l o gi vi ng
E ur ope t he m i ddl e f i nge r , a s um m i t on M a r c h 25t h pr e pa r e d w ha t G r e e c e
c a l l e d a “ l oa de d gun” . M e m be r c ount r i e s de c l a r e d t ha t t he y s t o od r e a dy t o
pool bi l a t e r a l l oa ns i nt o a f und t ha t , a l ong w i t h t he I M F , w a s r e a dy t o ba i l
out G r e e c e . G e r m a ny a t t a c he d s e ve r a l c ondi t i ons : a de c i s i on ha d t o be
t a ke n una ni m ous l y a nd i nc l ude “ s t r ong c ondi t i ona l i t y” t o r e f or m , a nd
l oa ns w oul d be e xt e nde d a t “ non- c onc e s s i ona l ” i nt e r e s t r a t e s , r e f l e c t i ng
t he r i s k of l e ndi ng t o G r e e c e . A bove a l l , t he m e c ha ni s m c oul d be us e d
onl y on t he ba s i s of ul t i m a r at i o, a s a l a s t r e s or t t o pr e ve nt G r e e c e f r om
de f a ul t i ng on i t s de bt . T hi s G e r m a n doc t r i ne , bor n of t a c t i c a l , dom e s t i c
a nd l e ga l c ons i de r a t i ons , w oul d c om e r e pe a t e dl y t o ha m pe r t he e ur o z one ’ s
a bi l i t y t o r e s pond de c i s i ve l y .
G e r m a ny be l i e v e d, w i t h good r e a s on, t ha t c ount r i e s w oul d c ut t he i r
budge t de f i c i t s a nd r e f or m t he i r e c onom i e s onl y unde r e xt r e m e pr e s s ur e
f r om m a r ke t s . M or e ove r , M e r ke l c oul d hope t o w i n ove r he r out r a ge d
vot e r s t o t he i de a of a ba i l – out onl y i f s he c oul d de m ons t r a t e t ha t i t w a s
ne e de d t o s a ve t he e ur o. A nd gi ve n t ha t oppone nt s w oul d i ne vi t a bl y
pe t i t i on t he c ons t i t ut i ona l c our t i n K a r l s r uhe , s he c oul d j us t i f y t he br e a c h
of t he no- ba i l – out r ul e i n E ur ope a n t r e a t i e s onl y on t he gr ounds of a
ge nui ne e m e r ge nc y , on t he w e l l – know n pr i nc i pl e of N ot k e nnt k e i n G e bot :
“ N e c e s s i t y know s no l a w ” . L a w ye r s i n B r us s e l s a l s o not e d t ha t t he no-
ba i l – out r ul e w a s ha r dl y c a t e gor i c a l . T he L i s bon t r e a t y s a ys onl y t ha t
c ount r i e s t ha t s ha l l “ not be l i a b l e f or or a s s um e ” t he de bt of ot he r s ; i t s a ys
not hi ng of l e ndi ng m one y .1 T ha t t he e ur o z one w oul d l a t e r i nvoke a not he r
a r t i c l e d e a l i ng w i t h a s s i s t a nc e f or na t ur a l di s a s t e r s s a ys m uc h a bout t he
l e ga l di s c om f or t .2

T he l oa de d gun di d not f r i gh t e n t he m a r ke t s . T he E ur ogr oup t he n
c oc ke d t he w e a pon on A pr i l 11t h, s a yi ng t ha t i t s t ood r e a dy t o l e nd G r e e c e
€30 bi l l i on i n t he f i r s t ye a r of a pr ogr a m m e , t o w hi c h t he I M F w oul d a dd
a not he r €15 bi l l i on. A pr e m i um of 300 ba s i s poi nt s w oul d be a dde d t o t he
bor r ow i ng c os t s – a s t e e p pr i c e , but not a s s t e e p a s t he 7% yi e l d t ha t
m a r ke t s w e r e de m a ndi ng f or G r e e k t e n- ye a r bonds . T hi s s t i l l pr ovi de d no
de t e r r e nt . I n l a t e A pr i l S t a nda r d & P oor ’ s dow ngr a de d G r e e k d e bt t o j unk
s t a t us , a nd a l s o c ut i t s r a t i ngs f or P or t ugue s e a nd S pa ni s h bonds . O n M a y
2nd, r e s pondi ng t o a f or m a l r e que s t f or he l p f r om P a pa ndr e o u, w ho s a i d
hi s c ount r y w a s “ a s i nki ng s hi p” , t he E ur ogr oup a gr e e d t o t he i ne vi t a bl e
ba i l – out . I t ha d gr ow n t o €110 bi l l i on ove r t hr e e ye a r s – t he l a r ge s t e ve r
pr ovi de d t o a s i ngl e c ount r y – a s i t be c a m e obvi ous t ha t pr i va t e i nve s t or s
w oul d not r ol l ove r e xi s t i ng de bt .
E ve n s o, t he de a l w a s f i l l e d w i t h c ont r a di c t i ons . G r e e c e w a s
s uppos e dl y be i ng r e s c ue d, b ut i t w a s s ubj e c t e d t o a n unw or ka bl e
pr ogr a m m e a nd puni t i ve r a t e s of i nt e r e s t ( M e r ke l boa s t e d t h a t G e r m a ny
w oul d m a ke a pr of i t on t he l oa ns ) . I M F s t a f f t hought t he r e s houl d be l e s s
up- f r ont a us t e r i t y a nd m or e s t r uc t ur a l r e f or m s , but t he E ur ope a ns w e r e
s t i l l f oc us e d on f i s c a l r ul e s . T he de bt – s us t a i na bi l i t y a s s e s s m e nt r e l i e d on
opt i m i s t i c a s s um pt i ons . O ne I M F of f i c i a l w a s bl unt e r : “ W e l i e d.” I nde e d,
i t w oul d e m e r ge l a t e r t ha t m a ny m e m be r s of t he I M F ’ s boa r d ha d de e p
m i s gi vi ngs a bo ut t he pr ogr a m m e .3 B r a z i l ’ s e xe c ut i ve di r e c t or , P a ul o
N ogue i r a B a t i s t a , w a s pr e s c i e nt w he n he a r gue d t ha t t he r i s ks of t he
pr ogr a m m e w e r e i m m e ns e . R a t he r t ha n a ba i l – out of G r e e c e i t c oul d
be c om e a ba i l – out of i nve s t or s a nd ba nks a s t he y dum pe d t he i r bonds ont o
of f i c i a l l e nde r s . T he w hol e t hi ng c oul d pr ove “ i l l c onc e i ve d a nd ul t i m a t e l y
uns us t a i na bl e ” . C r i t i c s a r gue d t ha t G r e e c e ’ s huge de bt s houl d i ns t e a d ha ve
be e n r e s t r uc t ur e d i m m e di a t e l y . T ha t s a i d, e ve n t he m os t ha w ki s h I M F s t a f f
m e m be r s t hough t i t w a s t oo da nge r ous t o do t hi s i n t he m i ddl e of a m a r ke t
pa ni c . B ut t he l i nge r i ng di s put e w oul d, l a t e r on, ha r de n t he I M F ’ s a t t i t ude
t o G r e e c e a nd f ut ur e r e s c ue s .
E ve n t he t r i pl i ng of t he G r e e k ba i l – out f a i l e d t o que l l t he m a r ke t s . A nd
t he c r i p pl i ng a dj us t m e nt de m a nde d of G r e e c e – de f i c i t r e duc t i on of 11
pe r c e nt a ge poi nt s ove r t hr e e ye a r s i n t he t e e t h of a r e c e s s i on, ne a r l y ha l f
of i t f r ont – l oa de d i n t he f i r s t ye a r – pr ovoke d r i ot s out s i de t he G r e e k

pa r l i a m e nt , a nd t he de a t h of t hr e e pe opl e w he n a na r c hi s t s s e t f i r e t o a
ba nk. A s G r e e k bonds r os e be yond 12% , c ont a gi on pus he d I r i s h yi e l ds
c l os e t o 6% a nd P or t ugue s e one s up a bove 7% . S t oc km a r ke t s a r ound t he
w or l d s l um pe d a s i nve s t or s f r e t t e d a bout t he f i na nc i a l a nd pol i t i c a l
s t a bi l i t y of a bl oc k t ha t m a de up a r ound a qua r t e r of gl oba l out put .
S a v e t h e e u r o
A f t e r m ont hs of i nde c i s i on a nd ha l f m e a s ur e s , t he e ur o w a s now i n m or t a l
da nge r . T he m ood of f or e bodi n g gr e w da r ke r s t i l l on M a y 6t h 2010, t he
da y of a s t r a nge “ f l a s h- c r a s h” on W a l l S t r e e t , i n w hi c h t he D ow J one s
I ndus t r i a l A ve r a ge c ol l a ps e d by a bout 1,000 poi nt s be f or e r e c ove r i ng
w i t hi n m i nut e s , pe r ha ps be c a us e of a t e c hni c a l gl i t c h. T he E C B ’ s
gove r ni ng c ounc i l , i n L i s bon t ha t da y f or i t s m ont hl y m e e t i ng, f a c e d a
m om e nt ous de c i s i on: s houl d i t s t a r t buyi ng s ove r e i gn bonds t o s t op t he
pa ni c ? T he F e d e r a l R e s e r ve a nd t he B a nk of E ngl a nd ha d be e n doi ng s o
unde r t he i r pol i c y of qua nt i t a t i ve e a s i ng t o br i ng dow n l ong- t e r m
bor r ow i ng c os t s . B ut t he E C B ha d not gone s o f a r , w a r y of t he pr ohi bi t i on
a ga i ns t a nyt hi ng r e s e m bl i ng “ m one t a r y f i na nc i ng” , t ha t i s , pr i nt i ng m one y
t o f i na n c e publ i c de bt . A f t e r t h e of f i c i a l m e e t i ng, T r i c he t t ol d j our na l i s t s
t ha t t he s ubj e c t of bond- buyi ng ha d not be e n di s c us s e d. L a t e r on ove r a n
i nf or m a l di nne r , how e ve r , t he c ounc i l ha d r e a c he d a t e nt a t i ve a gr e e m e nt t o
s t a r t s e l e c t i ve l y buyi ng t he bonds of vul ne r a bl e c ount r i e s .4 T he ne x t da y ,
a s l e a de r s ga t he r e d i n B r us s e l s f or a e ur o- z one – onl y s um m i t , os t e ns i bl y t o
e ndor s e t he ba i l – out of G r e e c e , m a ny pa r t i c i pa nt s s e e m e d una w a r e t ha t
t he y w o ul d be c a l l e d upon t o do s om e t hi ng m uc h bi gge r : s e t up a s a f e t y
ne t f or t he w hol e e ur o z one .
T r i c he t de l i ve r e d a s t e r n l e c t ur e . H e t ol d l e a de r s t he e ur o w a s i n
da nge r , a nd t ha t t he y w e r e t o bl a m e f or t he m e s s t hr ough r e c kl e s s pol i c i e s .
I t w a s now t he i r r e s pons i bi l i t y t o f i x i t . T r i c he t w oul d not d i s c l os e hi s
r e a di ne s s t o buy bonds unt i l t he l e a de r s ha d t a ke n de c i s i ve a c t i on; t he E C B
w oul d not r i s k a c t i ng a l one , or be i ng s e e n t o do s o unde r pol i t i c a l pr e s s ur e .
T he s um m i t c oul d not r e a c h a g r e e m e nt , s o f i na nc e m i ni s t e r s w e r e t ol d t o
t a ke up t he t a s k t w o da ys l a t e r , a S unda y , be f or e m a r ke t s r e ope ne d i n A s i a .
T he C om m i s s i on t he n t a bl e d a pr opos a l , ba s e d on i t s a i d pr ogr a m m e f o r
c e nt r a l a nd e a s t e r n E ur ope , t o c r e a t e a €60 bi l l i on w a r c he s t f or t he e ur o

z one . T he m one y w oul d be r a i s e d by i s s ui ng bonds on t he m a r ke t
gua r a nt e e d by t he E U budge t . T he B r i t i s h pr i m e m i ni s t e r , G or don B r ow n,
w ho ha d j us t l os t a ge ne r a l e l e c t i on on M a y 6t h, ha d t o be a s ke d f or hi s
a ppr ova l . M e m be r c ount r i e s , i nc l udi ng t he non- e ur o U K , w ou l d be l i a bl e
f or pos s i bl e l os s e s .
Y e t t oo l i t t l e m one y c oul d be r a i s e d t hi s w a y . A nd m i ni s t e r s w oul d not
e xt e nd l oa n gua r a nt e e s t o t he C om m i s s i on t o e xpa nd t he f und . I ns t e a d, a
s pe c i a l – pur pos e c om pa ny , i nc or por a t e d i n L uxe m bour g a nd ba c ke d by
gove r nm e nt gua r a nt e e s , w oul d be c r e a t e d t o e ns ur e na t i ona l gove r nm e nt s
r e t a i ne d f ul l c ont r ol ove r t he m one y . T he f i na l de a l c oul d not b e c onc l ude d
unt i l ni ght f a l l , a f t e r pol l i ng s t a t i ons c l os e d i n t he G e r m a n s t a t e of N or t h-
R hi ne W e s t pha l i a ( M e r ke l ’ s C hr i s t i a n D e m oc r a t s l os t ) . C ons e ns us w a s
t he n qui c kl y r e a c he d on t he a m ount : €440 bi l l i on. T hus w e r e bor n t he
C om m i s s i on’ s E ur ope a n F i na nc i a l S t a bi l i s a t i on M e c ha ni s m ( E F S M ) a nd
t he l a r g e r i nt e r – gove r nm e nt a l E ur ope a n F i na nc i a l S t a bi l i t y F a c i l i t y
( E F S F ) . T he I M F w oul d m a t c h e ve r y t w o e ur os put up by t he e ur o z one
w i t h on e of i t s ow n, a n unus u a l e nt r y i nt o r i c h- w or l d a f f a i r s . T he t ot a l
m a de a va i l a bl e t o de f e nd t he e ur o z one a m ount e d t o €750 bi l l i on, or
r oughl y a r ound $1 t r i l l i on.
T r i c he t now ha d t he pol i t i c a l c ove r he ne e de d. T he E C B a nnounc e d
t ha t i t w oul d bu y bonds unde r t he S e c ur i t i e s M a r ke t P r ogr a m m e ( S M P ) ,
not t o he l p c r i ppl e d c ount r i e s but on t he gr ounds t ha t dy s f unc t i ona l
m a r ke t s w e r e “ ha m pe r i ng t he m one t a r y pol i c y t r a ns m i s s i on m e c ha ni s m ” .
A t t h e s a m e t i m e , t he E C B ope ne d t he t a p f or l i qui di t y t o t he ba nks , w hi l e
t he F e de r a l R e s e r ve a nd ot he r c e nt r a l ba nks he l pe d out by r e ope ni ng dol l a r
s w a p l i ne s , i n e s s e nc e a m e a ns f or t he F e de r a l R e s e r ve t o e xt e nd dol l a r
l i qui di t y i n t he gl oba l f i na nc i a l s ys t e m vi a ot he r c ount r i e s ’ c e nt r a l ba nks
( w hi c h w oul d c ont i nue t o be a r t he c r e di t r i s k) . T he e nor m ous s um s
m obi l i s e d t ha t w e e ke nd w e r e s uppos e d t o be a de t e r r e nt , a w e a pon ne ve r
t o be us e d. B ut , j us t a s w i t h t he “ bi g ba z ooka ” t ha t H a nk P a ul s on, t he n t he
A m e r i c a n t r e a s ur y s e c r e t a r y , h a d t a l ke d a bout i n 2008, i t w oul d not be
l ong be f or e i t ha d t o be de pl oye d.
T he E C B ’ s U – t ur n on bond- buyi ng, f ol l ow i ng a n e a r l i e r U – t ur n on
t a ki ng G r e e k bonds a s c ol l a t e r a l f or ba nks , r a i s e d que s t i ons a bout i t s
i nde pe nde nc e . T e l l i ngl y , M e r ke l ga ve t he ba nk t he nod t o buy bonds e ve n
t hough A xe l W e be r , t he B unde s ba nk pr e s i de nt , w ho br i e f l y f l i r t e d w i t h t he

i de a , op pos e d t he m ove . I t i s e a s i e r f or pol i t i c i a ns t o ha ve t he c e nt r a l ba nk
put up t he m one y t ha n a s k f or i t f r om t a xpa ye r s . M or e ove r , g ove r nm e nt s
c oul d no t m a ke up t he i r m i nds a bout m a r ke t s . T he y de nounc e d s pe c ul a t or s
f or pl ot t i ng t o de s t r oy t he e ur o, ye t s e t out t o bor r ow hundr e ds of bi l l i ons
f r om t he s a m e f i na nc i e r s t o s a ve t he s i ngl e c ur r e nc y . T he y bl a m e d r a t i ngs
a ge nc i e s f or i gnor i ng t he da ng e r s of dodgy f i na nc i a l e ngi ne e r i ng, t he n
e xc or i a t e d t he m f or e xa gge r a t i ng t he t hr e a t of s ove r e i gn de f a ul t . B ut t he
e ve nt s i n M a y e s t a bl i s he d one pr i nc i pl e : f a c e d w i t h c a t a s t r ophe ,
gove r nm e nt s w oul d a c t . T he E C B w oul d a c t t oo, t hough onl y i f
gove r nm e nt s m o ve d f i r s t . Y e t d e l a y r a i s e d t he pr i c e of r e s ol vi n g t he c r i s i s ,
a nd a l s o f e d doubt s a bout w he t he r t he e ur o c oul d s ur vi ve .
M e r k o zy i n D e a u v i l l e
T he E ur ope a n s um m i t s i n J une a nd S e pt e m be r 2010 w e r e m or e or l e s s
r out i ne a f f a i r s , a l t hough s pr e a d s s t a r t e d c r e e pi ng up a ga i n i n t he s um m e r
a f t e r t he m a r ke t e uphor i a i n M a y . G ove r nm e nt s t ur ne d t o r e f or m i ng t he
i ns t i t ut i ona l s e t – up of t he e ur o . P a r t of t he pr i c e M e r ke l de m a nde d f or
ba i l i ng out G r e e c e w a s a s t r e ngt he ni ng of t he s t a bi l i t y a nd gr ow t h pa c t ,
a nd c l os e r c o- or di na t i on of e c onom i c pol i c i e s t o i m pr ove t he
c om pe t i t i ve ne s s of t he w e a ke r c ount r i e s . T hi s be c a m e pa r t of he r m a nt r a :
gr e a t e r c ont r ol i n e xc ha nge f or gr e a t e r s ol i da r i t y . S a r koz y w a s not ke e n on
s uc h not i ons . B ut he l i ke d t he i de a of c r e a t i ng a s m a l l e r , m or e e xc l us i ve
c or e c l ub t ha t w oul d ke e p out p e s ky l i be r a l f r e e t r a de r s f r om t he U K a nd
ot he r nor t h E ur ope a n c ount r i e s . I n M a r c h S a r koz y ha d s t a r t e d pus hi ng a n
ol d F r e n c h c onc e pt of a n e c ono m i c “ gove r nm e nt ” f or t he e ur o z one , l a t e r
s of t e ne d i n of f i c i a l c om m uni qué s a s “ gove r na nc e ” . T o hi s m i nd,
e c onom i e s s hou l d be r un by l e a de r s w i t h l ot s of di s c r e t i on, not by r ul e –
bound bur e a uc r a t s . O ne unde c l a r e d a i m w a s t o r e s t r a i n c om pe t i t i on by
ha r m oni s i ng t a xe s a nd s oc i a l s pe ndi ng t o F r e nc h l e ve l s .
R e c onc i l i ng t he s e pos i t i ons w a s m a de ha r de r by t w o pr obl e m s . F i r s t ,
t he F r a nc o- G e r m a n r e l a t i ons hi p, t he t r a di t i ona l e ngi ne of E ur ope a n
i nt e gr a t i on, w a s w or ki ng poor l y . S e c ond, bot h S a r koz y a nd M e r ke l w e r e
de e pl y s us pi c i ous of t he E ur ope a n C om m i s s i on. S o i n M a r c h 2010 E U
l e a de r s a ppoi nt e d V a n R om puy , not B a r r os o, t he C om m i s s i on pr e s i de nt , t o
dr a w up a pl a n t o t oughe n f i s c a l r ul e s . B ut t he C om m i s s i on t he n pr e –

e m pt e d V a n R om puy’ s r e por t by publ i s hi ng i t s ow n pa c k a ge of s i x
l e gi s l a t i ve pr op os a l s on e c onom i c gove r na nc e ( l a t e r know n a s t he “ s i x-
pa c k” ) . B e yond de f i c i t s , t he s i x – pa c k put gr e a t e r e m pha s i s on r e duc i ng t he
s t oc k of de bt ( t o I t a l y’ s di s m a y) . A nd be yond t he f i s c a l t a r ge t s , E U
s ur ve i l l a nc e w o ul d l ook a t a br oa de r r a nge of e c onom i c i n di c a t or s t o
de t e c t unde r l yi ng i m ba l a nc e s . L a s t l y , i t i nve r t e d vot i ng r u l e s s o t ha t
s a nc t i ons a ga i n s t m i s c r e a nt s no l onge r r e qui r e d a qua l i f i e d m a j or i t y of
c ount r i e s ; i ns t e a d, pe na l t i e s r e c om m e nde d by t he C om m i s s i on w oul d be
a ppr ove d unl e s s bl oc ke d by a qua l i f i e d m a j or i t y .
G e r m a ny a l s o pus he d t w o m or e r a di c a l i de a s . O ne w a s t o s us pe nd t he
vot i ng r i ght s of pr of l i ga t e c oun t r i e s . S uc h pr ovi s i ons e xi s t e d f or c ount r i e s
br e a c hi ng f unda m e nt a l va l ue s of de m oc r a c y a nd hum a n r i ght s ; t he s a m e
s houl d a ppl y f or br e a c he s of t h e e ur o z one ’ s f i s c a l r ul e s , t hou ght M e r ke l .
H e r ot he r de m a nd w a s a m e c ha ni s m f or t he “ or de r l y i ns ol ve nc y” of
gove r nm e nt s . T hi s i de a w a s not ne w . A f t e r A r ge nt i na ’ s de f a ul t on i t s
f or e i gn de bt i n 2001, t he I M F pr opos e d a s t a t ut or y “ s ove r e i gn de bt
r e s t r uc t ur i ng m e c ha ni s m ” , a n i ns ol ve nc y r e gi m e f or gove r nm e nt s a ki n t o
t he U S C ha pt e r 11 ba nkr upt c y f or c om pa ni e s . T he a i m w a s t o m a ke
de f a ul t l e s s m e s s y a nd pa i nf ul , a nd e ns ur e t ha t ba i l – out s do not s e r ve j us t a
f e w l uc ky c r e di t or s . B ut t he pr o pos a l r a n i nt o i ns ur m ount a bl e oppos i t i on,
not l e a s t f r om t he U ni t e d S t a t e s , w hi c h di d not w a nt t o c e de pow e r t o a
s upr a na t i ona l a u t hor i t y t o c o- or di na t e t he pr oc e s s . T he c r i s i s i n G r e e c e
br ought t he i de a ba c k t o t he f or e . I n t he e ur o z one , a t l e a s t , t he i de a of a
s upr a na t i ona l body w a s w e l l – e s t a bl i s he d t hough a t t i m e s a c c e pt e d onl y
gr udgi ngl y .
A l l t hi s w a s pa r t of G e r m a ny’ s de t e r m i ne d e f f or t t o m i ni m i s e t he r i s k
t ha t i t w oul d be c a l l e d upon a ga i n t o ba i l out a not he r c ount r y or , i nde e d, t o
ba i l out G r e e c e a s e c ond t i m e . T oughe r f i s c a l r ul e s , m oni t or i ng a nd
s a nc t i ons w oul d r e duc e t he c ha nc e s of c ount r i e s ge t t i ng i nt o t r oubl e . A nd
i f a n ot he r de bt c r i s i s di d t a ke pl a c e , a nd t he c ount r y ne e de d a ba i l – out , t he
t a xpa ye r s houl d not be m a de t o c a r r y t he w hol e bur de n. M o r e ove r , t he
t hr e a t of l os s e s s houl d s ha r pe n t he vi gi l a nc e of bond m a r ke t s .
O t he r c o unt r i e s f or t he m os t pa r t a c c e pt e d t he ne e d t o s t r e ngt he n t he
s t a bi l i t y a nd gr ow t h pa c t . B ut gove r nm e nt s , a nd a bove a l l t he E C B , w e r e
r e s i s t a nt t o a ny not i on of f a c i l i t a t i ng de bt r e s t r uc t ur i ng. O ne r e a s on w a s a
r e l uc t a nc e t o be a r t he s t i gm a : de f a ul t i ng on de bt w a s s om e t hi ng t ha t

ha ppe ne d i n poor e r c ount r i e s , n ot t he i ndus t r i a l i s e d w or l d. A not he r w a s a
c onc e r n t ha t , i n a w or l d i n w hi c h c ount r i e s c oul d m or e e a s i l y r e s t r uc t ur e
de bt , t he bor r ow i ng c os t s f or a l l s ove r e i gns m i ght be r a i s e d. A t hi r d w a s
t he f e a r of r e ki n dl i ng m a r ke t t ur bul e nc e . I ns t e a d of e ns ur i ng t ha t m a r ke t s
e nf or c e d di s c i pl i ne on gove r nm e nt s i n f ut ur e , de bt r e s t r uc t ur i ng m i ght
pr om pt a not he r pa ni c t ha t w oul d pus h gove r nm e nt s i nt o i m m e di a t e
ba nkr upt c y . A f t e r a l l , G r e e c e w a s not t he onl y E ur ope a n c ount r y w i t h a
l a r ge bur de n of de bt .
S om e of t he c ha nge s t ha t G e r m a ny de m a nde d w oul d r e qui r e a c ha nge
of t he t r e a t i e s , w hi c h m a ny c ount r i e s w e r e r e l uc t a nt t o e m ba r k on a f t e r t he
pol i t i c a l a gony t he y s uf f e r e d ove r t he c ons t i t ut i ona l a nd L i s bon t r e a t i e s .
B ut M e r ke l f a vour e d t r e a t y c ha nge a nyw a y , de s pi t e t he pr om i s e t ha t
L i s bon w oul d be t he l a s t r e vi s i on i n a ge ne r a t i on. S he w or r i e d t ha t t he
l e ga l ba s i s of t he E F S F m i ght not s t a nd up t o c ha l l e nge i n t h e K a r l s r uhe
c our t . E ve n i f i t di d, t he f und w a s due t o e xpi r e i n 2013 a nd w oul d s ur e l y
ha ve t o be r e pl a c e d by s om e t hi ng m or e pe r m a ne nt .
O n O c t obe r 18t h V a n R om puy c a l l e d a l a s t m e e t i ng of hi s t a s kf or c e of
f i na nc e m i ni s t e r s i n L uxe m bour g. C hr i s t i ne L a ga r de , t he n t he F r e nc h
f i na nc e m i ni s t e r , pr e di c t a bl y s ought t o a m e nd t he “ a ut om a t i c i t y” of t he
s a nc t i ons . B ut a l l w e r e a s t ounde d t o he a r t he t he n G e r m a n de put y f i na nc e
m i ni s t e r , J ör g A s m us s e n, de c l a r e he w a s i n c om pl e t e a gr e e m e nt w i t h he r .
W ha t w e r e F r a nc e a nd G e r m a ny up t o? T he a ns w e r c a m e l a t e r i n t he
e ve ni ng f r om t he F r e nc h s e a s i de r e s or t of D e a uvi l l e , w he r e S a r koz y w a s
hos t i ng M e r ke l f or a F r a nc o- G e r m a n s um m i t ( a s w e l l a s a t hr e e – w a y
s um m i t w i t h R us s i a ) . F r a nc e a n d G e r m a ny now s uppor t e d a ne w t r e a t y t o
m a ke pos s i bl e t he c r e a t i on of a “ r obus t a nd pe r m a ne nt ” c r i s i s – r e s ol ut i on
s ys t e m . G e r m a n y got a pr om i s e t ha t , i n f ut ur e ba i l – out s , t he r e s houl d be a n
“ a de qua t e pa r t i c i pa t i on by t he pr i va t e s e c t or ” ; i n ot he r w or ds , pr i va t e
bondhol de r s w oul d ha ve t o be a r pa r t of t he pa i n i n f ut ur e c r i s e s . F r a nc e
obt a i ne d a s of t e ni ng of t he “ a ut om a t i c ” s a nc t i ons .
I n B r us s e l s t he a c c or d w a s s e e n a s t he w or s t of pol i t i c a l de a l s . M a ny
w or r i e d a bout t he w e a ke ni ng o f t he c om m i t m e nt t o f i s c a l di s c i pl i ne a nd
f e a r e d t ha t t he t hr e a t of f ut ur e de bt r e s t r uc t ur i ng, know n a s pr i va t e – s e c t or
i nvol ve m e nt ( P S I ) , m i ght c a u s e a l a r m i n m a r ke t s t ha t s e e m e d t o be
c a l m i ng dow n. E ve n S a r koz y’ s s e ni or a dvi s e r s w a r ne d hi m a ga i ns t i t . T he y
w or r i e d t ha t t he i m pl i c i t a s s um pt i on of s ol i da r i t y w i t hi n t he e u r o z one w a s

be i ng e xpl i c i t l y r e j e c t e d t hr ou gh P S I , w i t h unf or e s e e a bl e c ons e que nc e s .
B ut he ove r r ul e d t he m .
D e a uvi l l e t hus m a r ks t he s t a r t of t he “ M e r koz y” e r a . M e r ke l be c a m e
t he d om i na nt f i gur e i n E ur ope w hi l e S a r koz y de c i de d t ha t t he onl y w a y t o
m a na ge t he c r i s i s , a nd t o ke e p m a r ke t s of f F r a nc e ’ s ba c k, w a s t o hug he r
c l os e . D e a uvi l l e a l s o m a r ke d a s e c ond, m or e da nge r ous pha s e of t he s t or y .
I nve s t or s s t a r t e d t o w a l k a w a y f r om vul ne r a bl e s ove r e i gns a nd, w i t hi n
da ys , t o r un a f t e r a s pa t e of ba d ne w s . A s t a t i s t i c a l r e vi s i on r a i s e d G r e e c e ’ s
2009 de f i c i t a bove 15% of G D P , a nd i t s ove r a l l de bt by a bout 12
pe r c e nt a ge poi nt s t o 127% of G D P ; G r e e c e a dm i t t e d i t w a s ha vi ng
pr obl e m s c ol l e c t i ng t a xe s ; a nd P I M C O , one of t he bi gge s t f i xe d- i nc om e
m a na ge r s , pr e di c t e d t ha t G r e e c e w a s l i ke l y t o de f a ul t w i t hi n t hr e e ye a r s .
T he m oo d a t t he ne xt E U s um m i t on O c t obe r 28t h w a s gr i m . L e a de r s
of s m a l l e r c ount r i e s w e r e a nno ye d by t he F r a nc o- G e r m a n di kt a t a nd t he
pr e s s ur e t o r e ope n t he t r e a t i e s . A nd T r i c he t , w ho ha d de m a nde d t ha t t he
V a n R om puy r e por t f or m a l l y not e hi s r e s e r va t i ons ove r w e a ke ne d
s a nc t i ons , w a r ne d l e a de r s ove r di nne r t ha t t he t hr e a t of de bt r e s t r uc t ur i ng
w oul d s pook m a r ke t s . “ Y ou d on’ t r e a l i s e t he gr a vi t y of t he s i t ua t i on,”
be ga n T r i c he t . B ut he w a s c ut of f by S a r koz y: “ P e r ha ps you s pe a k t o
ba nke r s . W e , w e a r e a ns w e r a bl e t o our c i t i z e ns .” M e r ke l j oi ne d i n:
t a xpa ye r s c oul d not be a s ke d t o f oot t he w hol e bi l l , not w he n t he y ha d j us t
pa i d t o s a ve t he ba nks . A nd M e r ke l got m os t of w ha t s he w a nt e d, w i t h
s ur pr i s i ng e a s e . T he s um m i t a gr e e d t o r e vi s e t he t r e a t y a l t hough, t o m a ke
s ur e i t w a s a “ l i m i t e d” c ha nge t ha t c oul d be pa s s e d w i t h a s m a l l e r r i s k of
r e f e r e ndum s , M e r ke l ha d t o a ba ndon t he de m a nd t o s us pe nd vot i ng r i ght s ,
w hi c h S a r koz y ha d c onc e de d a t D e a uvi l l e .
T he e ur o z one t hus a br upt l y m ove d f r om t he i de a of ba i l i ng ou t de bt or
c ount r i e s t o ba i l i ng i n bondhol de r s . T he pr i nc i pl e w a s s ound but t he
e xe c ut i on c ont r a di c t or y , not l e a s t be c a us e , a s e xpl a i ne d i ni t i a l l y by t he
G e r m a ns , P S I w a s l i ke l y t o a ppl y t o a l l f ut ur e ba i l out s . I n M a y
gove r nm e nt s ha d de c l i ne d t o i m pos e ha i r c ut s on G r e e k bonds f or f e a r of
de s t a bi l i s i ng m a r ke t s , t hus p r e t e ndi ng t ha t G r e e c e ’ s i ns ol ve nc y w a s
m e r e l y a m a t t e r of a s hor t a ge of l i qui di t y . N ow t he y s e e m e d t o be
t hr e a t e ni ng a l l f ut ur e i nve s t or s i n e ur o- z one bonds w i t h pos s i bl e l os s e s ; i n
ot he r w or ds , e ve n c ount r i e s w i t h l i qui di t y pr obl e m s m i ght be t r e a t e d a s
i ns ol ve nt . F or T r i c he t t hi s w a s a be t r a ya l of t he E C B ’ s pol i t i c a l l y r i s ky

de c i s i on t o s t a r t buyi ng gove r nm e nt bonds t o hol d dow n bor r ow i ng c os t s .
B y t he t i m e of t he G 20 s um m i t i n S e oul on N ove m be r 12t h, yi e l ds on
P or t ugue s e a nd I r i s h bonds w e r e w e l l ove r t he i r pr e vi ous pe a ks i n M a y .
E ur ope a n f i na nc e m i ni s t e r s s a i d t he i s s ue ha d be e n m i s unde r s t ood:
e xi s t i ng bonds w e r e s a f e ; onl y ne w bonds i s s ue d f r om 201 3 m i ght be
s ubj e c t t o ha i r c ut s . B ut t he da m a ge of D e a uvi l l e w a s done .
N o l u c k f o r t h e I r i s h ( o r P o r t u g u e s e )
A l a r m now f oc us e d on I r e l a nd . H a vi ng a l r e a dy pour e d bi l l i ons i nt o t he
ba nks , t he gove r nm e nt a nnounc e d i n S e pt e m be r 2010 i t s “ f i na l e s t i m a t e ”
f or ba nk l os s e s . A ngl o I r i s h B a nk, t he m os t c a va l i e r of t he l ot , w oul d c os t
€30 bi l l i on. A dd e d t o I r e l a nd’ s a l r e a dy l a r ge budge t ga p, t he one – of f c os t
of t he ba nki ng bus t pus he d I r e l a nd’ s budge t de f i c i t i n 2010 t o 32% of G D P .
F e a r s f o r t he s ol ve nc y of t he s t a t e pus he d up bond yi e l ds . D e a uvi l l e m a de
a ba d s i t ua t i on i m pos s i bl e . I n m i d- N ove m be r I r e l a nd s t a r t e d ne got i a t i ng
t he t e r m s f or a ba i l – out , de s pi t e pr ot e s t s t ha t i t ha d e nough c a s h t o s ur vi ve
f or m ont hs t o c om e . B ut t he E C B ha d ha d e nough of pr oppi ng up I r i s h
ba nks . B y t he e nd of N ove m be r I r e l a nd ha d a gr e e d t o a €67.5 bi l l i on
a s s i s t a nc e pa c ka ge f r om t he e ur o z one a nd t he I M F , w i t h bi l a t e r a l l oa ns
f r om t he U K a nd S w e de n.
T he l i qui di t y pr ovi de d by t he E C B ha d pr ove d t o be a m i xe d bl e s s i ng.
I t a l l ow e d I r e l a nd t o a voi d a s udde n s t op i n f undi ng, a s ha d pr e vi ous l y
ha ppe ne d i n I c e l a nd ( w hi c h w a s not i n t he E U ) . B ut t he E C B a l s o
pr e ve nt e d t he I r i s h gove r nm e nt f r om pr ot e c t i ng t a xpa ye r s by i m pos i ng
l os s e s o n s e ni or ba nk c r e di t or s , a ga i n a s ha d ha ppe ne d i n I c e l a nd ( i t a l s o
w i pe d o ut f or e i g n de pos i t or s ) . E ve n s o, t he ba nki ng bus t w a s not t he onl y
or e ve n t he m a i n c a us e of I r e l a nd’ s e c onom i c t r oubl e s ; t he r e c e s s i on
c a us e d by t he bur s t i ng of t he pr ope r t y bubbl e c r e a t e d a budge t de f i c i t of
12% of G D P i n 2010. B ut t he ba d ba nks , a nd D e a uvi l l e , t i ppe d I r e l a nd i nt o
s e e ki ng a ba i l – out . I t a l s o l e d t o a n e a r l y e l e c t i on a nd t he f a l l of t he F i a nna
F a i l – l e d gove r nm e nt of B r i a n C ow e n i n F e br ua r y 2011.
I n P or t uga l , m e a nw hi l e , i t w a s t he r e s i gna t i on of t he S oc i a l i s t
gove r nm e nt of J os é S óc r a t e s , w hi c h ha d f a i l e d t o w i n pa r l i a m e nt a r y
s uppor t f or a f our t h a us t e r i t y budge t i n M a r c h 2011 t ha t pus he d t he
c ount r y i nt o t he a r m s of e ur o- z one r e s c ue r s . P or t uga l a ppl i e d f or a ba i l – out

i n A pr i l a nd f i na l i s e d t he ne got i a t i on f or a €78 bi l l i on pa c ka ge on M a y
4t h. I t s de bt w a s not a s hi gh a s G r e e c e ’ s , nor di d i t ha ve a n out – of – c ont r ol
ba nki ng s e c t or l i ke I r e l a nd. I ns t e a d, i t s w oe s w e r e m or e l i ke I t a l y’ s : ye a r s
of c hr oni c a l l y l ow gr ow t h. A nd w he r e a s t he e ur o z one ha d be e n r e l uc t a nt
t o he l p G r e e c e , i t w a s now ke e n f or bot h I r e l a nd a nd P or t uga l t o a ppl y f or
a s s i s t a nc e t o t r y t o s t op c ont a gi on f r om s pr e a di ng t o bi gge r c ount r i e s l i ke
S pa i n or I t a l y .
T he pr ogr a m m e s f or I r e l a nd a nd P or t uga l w e r e de vi s e d w i t h m or e
pl a us i bl e f i gur e s t ha n t he one f or G r e e c e . T he t w o c ount r i e s be ne f i t e d
f r om ha vi ng f ul l y f unc t i ona l g ove r nm e nt s a nd, e s pe c i a l l y i n t he c a s e of
I r e l a nd, ha d e xpor t s e c t or s t ha t c oul d be ne f i t f r om t he pr oc e s s of “ i nt e r na l
de va l ua t i on” . I n c ont r a s t w i t h G r e e c e , m or e ove r , bot h ha d oppos i t i on
pa r t i e s t ha t f or t he m os t pa r t a gr e e d w i t h t he ba i l – out pr ogr a m m e s . T he
e l e c t i on of F i ne G a e l ’ s E nda K e nny i n I r e l a nd a nd of P e dr o P a s s os C oe l ho
of t he S oc i a l D e m oc r a t i c P a r t y i n P or t uga l ( bot h f i s c a l c ons e r va t i ve s ,
de s pi t e t he m i s l e a di ng na m e of t he l a t t e r ’ s pa r t y) c a us e d l i t t l e di s r upt i on
t o t he t r oi ka ’ s pr ogr a m m e f or f i s c a l c ons ol i da t i on a nd s t r uc t ur a l r e f or m s .
C o m p r e h e n s i v e f a i l u r e
T he ne w ba i l – out s i n t he w i nt e r of 2010–11 pus he d E ur ope a n l e a de r s t o
s e e k w h a t t he y c a l l e d a “ c om pr e he ns i ve s ol ut i on” . T he r e w a s , i ne vi t a bl y ,
m uc h di s a gr e e m e nt a bout w ha t t hi s w oul d e nt a i l . S om e t hought t he
pr i or i t y s houl d be m or e “ s ol i da r i t y” t o he l p c ount r i e s c ope w i t h hi gh bond
yi e l ds . I n D e c e m be r 2010 J e a n- C l a ude J unc ke r , L uxe m bour g’ s ve t e r a n
pr i m e m i ni s t e r a nd pr e s i de nt of t he E ur ogr oup, c o- a ut hor e d a c a l l w i t h
I t a l y’ s f i na nc e m i ni s t e r , G i ul i o T r e m ont i , f or t he e ur o z one t o s t a r t i s s ui ng
c om m on E ur obonds , gua r a nt e e d j oi nt l y by a l l e ur o- z one c ount r i e s . T hi s
w oul d “ s e nd a c l e a r m e s s a ge t o gl oba l m a r ke t s a nd E ur ope a n c i t i z e ns of
our pol i t i c a l c om m i t m e nt t o e c onom i c a nd m one t a r y uni on, a nd t he
i r r e ve r s i bi l i t y o f t he e ur o” .5 B ut G e r m a ny w oul d ha ve none of i t . T o be gi n
w i t h, j oi nt bonds w e r e i l l e ga l unde r t he t r e a t i e s , G e r m a ny a r gue d.
M or e ove r , gua r a nt e e i ng t he de bt of ot he r s w oul d m e a n t a ki ng on l a r ge a nd
pot e nt i a l l y unl i m i t e d l i a bi l i t i e s , a nd w oul d pr ovi de a n i nc e nt i ve f or
pr of l i ga c y . I ns t e a d, G e r m a ny w a nt e d m or e c ont r ol a nd di s c i pl i ne .

I t s pr i o r i t y w a s t he f i na l i s a t i on of t he t r e a t y c ha nge t o c r e a t e a
pe r m a ne nt ba i l – out f und, t o be know n a s t he E ur ope a n S t a bi l i t y
M e c ha ni s m ( E S M ) . T hi s w a s f ol l ow e d by m ove s t o e nc ou r a ge m or e
s t r uc t ur a l r e f or m s . O ve r t w o s um m i t s i n M a r c h 2011 l e a de r s a gr e e d t o a
vol unt a r y pa c t t o pr om ot e l a bour – m a r ke t f l e xi bi l i t y a nd ot he r a c t i on. I t
w a s f i r s t know n a s t he C om pe t i t i ve ne s s P a c t , t he n t he P a c t f or t he E ur o
a nd, i n i t s f i na l f or m , t he E ur o P l us P a c t . O nc e a ye a r , c oun t r i e s w oul d
m a ke r e f or m c om m i t m e nt s t h a t w oul d be s c r ut i ni s e d by pe e r s . S om e
c ount r i e s , l i ke B e l gi um , di s l i ke d t he c ha l l e nge t o t he i r w a ge – i nde xa t i on
s ys t e m s ; ot he r s , l i ke I r e l a nd, w or r i e d a bout t he pr e s s ur e t o r a i s e t he i r l ow
c or por a t e t a xe s . B ut pe r ha ps t he s t r onge s t r e a c t i on c a m e f r om non- e ur o
c ount r i e s t ha t di s l i ke d t he c om m i t m e nt , pus he d by F r a nc e , t o h ol d s pe c i a l
e ur o- z one s um m i t s a t l e a s t onc e a ye a r . T he E ur o P l us P a c t t ur ne d out t o
be i ne f f e c t ua l , a nd w a s s oon f o r got t e n. M a ny a s pe c t s of e c onom i c pol i c y
r e m a i ne d t he c om pe t e nc e of na t i ona l gove r nm e nt s , s o t he c om m i t m e nt s
w oul d not be bi ndi ng. A bi t of pe e r pr e s s ur e f r om E ur ope c oul d not
ove r c om e t he r e s i s t a nc e a t hom e t ha t s uc h r e f or m s w oul d i ne vi t a bl y
pr ovoke .
T he que s t i on of s ol i da r i t y c oul d not be a voi de d f or l ong. B y s pr i ng i t
w a s a ppa r e nt t ha t t he E F S F w a s unde r pow e r e d, not j us t be c a us e i t w a s
s t a r t i ng t o us e up i t s r e s our c e s f or I r e l a nd a nd P or t uga l , but be c a us e i t s
r e a l l e ndi ng c a pa c i t y w a s onl y a bout €250 bi l l i on, not t he a dve r t i s e d €440
bi l l i on. I t s a bi l i t y t o bor r ow on A A A t e r m s w a s l i m i t e d by t he f a c t t ha t
onl y s i x c ount r i e s ha d t ha t c r e di t r a t i ng. T he r e w a s a l s o gr ow i ng pr e s s ur e
t o t ur n t he E F S F i nt o a m or e f l e xi bl e c r i s i s – m a na ge m e nt t ool , not j us t a
f und of l a s t r e s or t . T he “ c om p r e he ns i ve pa c ka ge ” a nnounc e d on M a r c h
24t h a l l ow e d bot h t he t e m por a r y E F S F a nd t he ne w E S M t o buy bonds on
t he p r i m a r y m a r ke t ( but not t he s e c onda r y m a r ke t ) . T he E S M w oul d not be
ope r a t i ona l unt i l 2013. B ut t he f i na l a gr e e m e nt t o e nha nc e t h e E F S F , by
i nc r e a s i ng l oa n gua r a nt e e s s o t h a t i t c oul d bor r ow t o i t s f ul l he a dl i ne l e ve l ,
w oul d ha ve t o w a i t unt i l J une , a f t e r a n e l e c t i on i n F i nl a nd.
O n A pr i l 7t h, t he da y t ha t P or t uga l a ppl i e d f or i t s ba i l – out , t he E C B
de c i de d pe r ve r s e l y t o r a i s e i t s i nt e r e s t r a t e . T he c ha nge w a s s m a l l – j us t
0.25% – but i t w a s a w r ong- he a de d s i gna l none t he l e s s . R e c ove r y i n t he
e ur o z one w a s w e a k, w i t h t he not a bl e e xc e pt i on of G e r m a ny . H e a dl i ne
i nf l a t i on w a s s l i ght l y hi ghe r t ha n t he E C B ’ s t a r ge t of “ be l ow but c l os e t o

2% ” be c a us e of hi ghe r oi l pr i c e s , but c or e i nf l a t i on w a s a r ound 1% . T he
r e a l a r gu m e nt w a s pol i t i c a l . T he E C B ’ s bond- buyi ng pol i c y ha d pr om pt e d
t he r e s i gna t i on i n F e br ua r y of A xe l W e be r , pr e s i de nt of t he B unde s ba nk
a nd t he m os t obvi ous s uc c e s s or t o T r i c he t . I t m us t ha ve s e e m e d a good
m om e nt f or a ny hope f ul s t o e s t a bl i s h t he i r i nf l a t i on- bus t i ng c r e de nt i a l s .
D e f a u l t o p t i o n s
B y M a r c h 2011 t he G r e e k pr o bl e m w a s r e t ur ni ng t o t he f or e . E a r l y on
P a pa ndr e ou ha d e a r ne d pr a i s e f or s om e br a ve be l t – t i ght e ni ng, but w or r i e s
gr e w t ha t s t r uc t ur a l r e f or m s w e r e f a l l i ng be hi nd a nd pr i va t i s a t i on ha d
m a de no pr ogr e s s a t a l l . M a t t e r s w e r e not he l pe d by s uc c e s s i ve s t a t i s t i c a l
r e vi s i ons , w hi c h r e ve a l e d G r e e c e ’ s f i s c a l hol e t o be de e pe r t ha n e xpe c t e d.
A nd t he r e c e s s i on w a s a l s o w or s e t ha n e xpe c t e d. B e hi nd c l os e d door s a t a
s um m i t on M a r c h 11t h, P a pa ndr e ou s poke a bout t he gr i m opt i ons f a c i ng
hi s c ount r y: l e a ve t he e ur o, i m pos e ha i r c ut s on bondhol de r s or c ha nge t he
m a r ke t ’ s pe r c e pt i ons .
A s of t e ni ng of t he ba i l – out t e r m s w a s a n a t t e m pt t o ke e p t he t hi r d
opt i on a l i ve : i nt e r e s t w oul d be r e duc e d by a poi nt a nd l oa n m a t ur i t i e s
e xt e nde d t o 7.5 ye a r s ( a ga i ns t a pr om i s e t o s t e p up pr i va t i s a t i on) . I r e l a nd
w a s de ni e d t he s a m e t e r m s be c a us e K e nny r e s i s t e d pr e s s ur e f r om
G e r m a ny a nd e s pe c i a l l y F r a nc e t o r a i s e i t s l ow r a t e of c or por a t e t a x, e ve n
t hough a t t r a c t i n g i nve s t m e nt a nd boos t i ng e xpor t s of f e r e d t he be s t hope of
r e pa yi ng i t s de bt .
D e s pi t e t he c onc e s s i on t o G r e e c e , t he f oc us w oul d qui c kl y s hi f t t o de bt
r e s t r uc t ur i ng. T a l k a t D e a uvi l l e a bout P S I w a s pus hi ng G r e e k bonds i nt o a
s e l f – f ul f i l l i ng s pi r a l . G r e e k yi e l ds r os e f r om m i d- A pr i l a m i d gr ow i ng t a l k
of h a i r c ut s a nd e ve n of G r e e c e l e a vi ng t he e ur o. P l a i nl y , G r e e c e w oul d not
be a bl e t o s t a r t bor r ow i ng f r om m a r ke t s i n 2012, a s i t s ba i l – out pr ogr a m m e
pr oj e c t e d. A nd unl e s s t he f i na nc i ng ga p w a s f i l l e d, t he I M F w oul d ha ve t o
s us pe nd pa ym e n t s be c a us e of i t s r ul e t ha t pr ogr a m m e s be f ul l y f i na nc e d
f or a ye a r i n t he f ut ur e . T he c hoi c e c a m e dow n t o gr a nt i ng G r e e c e a s e c ond
ba i l – out , be l a t e dl y r e s t r uc t ur i ng i t s de bt m ount a i n, or s om e c om bi na t i on of
t he t w o. G e r m a ny a nd s om e I M F s t a f f f a vour e d i m pos i ng a t l e a s t s om e
l os s e s on pr i va t e bondhol de r s . B ut t he y r a n i nt o t w o s e pa r a t e pr obl e m s .
T he f i r s t w a s t he a r r e s t on c ha r ge s of s e xua l a s s a ul t ( e ve nt ua l l y dr oppe d)

of S t r a us s – K a hn , t he I M F ’ s c hi e f . H i s de put y , J ohn L i ps ky , op pos e d de bt
r e s t r uc t ur i ng; I M F ha w ks w oul d ha ve t o bi de t he i r t i m e unt i l t h e a r r i va l of
L a ga r de i n J ul y . T he s e c ond a nd gr e a t e r obs t a c l e w a s t he i m pl a c a bl e
r e s i s t a nc e of t he E C B t o a ny of t he va r i ous de gr e e s of f a i l ur e t o r e pa y de bt
f ul l y a nd on t i m e . N o s e l e c t i ve de f a ul t , no c r e di t e ve nt , no de f a ul t , i ns i s t e d
T r i c he t ; not hi ng s houl d c a s t doubt on t he “ s ove r e i gn s i gna t ur e ” .
G r e e k p ol i t i c s a l s o be c a m e m or e f r a ught . I n J une P a pa ndr e ou r e pl a c e d
hi s f i na nc e m i ni s t e r , G e or ge P a pa c ons t a nt i nou, w i t h E va nge l os V e ni z e l os ,
a pa r t y he a vyw e i ght . T he ne w m a n m a de a poor i m pr e s s i on a t hi s f i r s t
E ur ogr oup m e e t i ng w he n he i ns i nua t e d t ha t t he e ur o z one c oul d not a f f or d
t o l e t G r e e c e go bus t .
N o P S I m p l e h a i r c u t
T he s um m i t i n J ul y 2011 t ur ne d i nt o t w o s e pa r a t e ne got i a t i ons , one a m ong
l e a de r s a nd a pa r a l l e l one w i t h ba nke r s , r e pr e s e nt e d by t he I ns t i t ut e of
I nt e r na t i ona l F i na nc e , f or a “ vol unt a r y” c ont r i but i on. A f t e r m or e t ha n
s e ve n h our s of t a l ks , e ur o- z one l e a de r s a gr e e d t o gi ve G r e e c e a s e c ond
ba i l – out w or t h €109 bi l l i on. “ V ol unt a r y” P S I w oul d br i ng i n a n e xt r a €37
bi l l i on, r e s ul t i ng i n a n e s t i m a t e d c ut of 21% i n t he de bt bur de n ( c a l c ul a t e d
i n t e r m s of ne t pr e s e nt va l ue ) . T he r e pa ym e nt t e r m s on l oa ns w e r e gr e a t l y
s of t e ne d. T he i nt e r e s t r a t e w a s br ought dow n by a not he r 150 b a s i s poi nt s ,
t o a r ound 3.5% , a nd t he m a t ur i t i e s e xt e nde d f r om 7.5 t o be t w e e n 15 a nd
30 ye a r s , w i t h a t e n- ye a r gr a c e pe r i od. C r uc i a l l y , t he s a m e t e r m s w e r e
e xt e nde d t o I r e l a nd a nd P or t uga l , w i t h a pr om i s e t ha t t he e ur o z one w oul d
c ont i nue t o f und c ount r i e s unt i l t he y r e ga i ne d a c c e s s t o m a r ke t s , a s l ong a s
t he y c o m pl i e d w i t h r e f or m c ondi t i ons . T he de c i s i on pr ove d t o be a
gods e nd f or I r e l a nd, w hos e bon d yi e l ds pr ogr e s s i ve l y dr oppe d, a ga i ns t t he
t r e nd i n s out he r n E ur ope .
L e a de r s m or e or l e s s bur i e d D e a uvi l l e w he n t he y de c l a r e d t ha t P S I ha d
be e n a n “ a n e xc e pt i ona l a nd uni que ” s ol ut i on f or G r e e c e ; a l l ot he r
c ount r i e s w oul d “ honour f ul l y t he i r ow n i ndi vi dua l s ove r e i gn s i gna t ur e ” .
T hi s ha d be e n o ne of t hr e e c ond i t i ons s e t by T r i c he t i n r e t ur n f or r e l e nt i ng
on a l i m i t e d de bt r e s t r uc t ur i ng. T he ot he r s w e r e t ha t t he E C B ’ s hol di ngs of
G r e e k d e bt w ou l d be s pa r e d t h e ha i r c ut , a nd t ha t t he E S M w oul d r e l i e ve
t he E C B of t he bur de n of buyi ng bonds on t he s e c onda r y m a r ke t . I nde e d,

t he E S M w a s m a de m or e f l e xi bl e i n ot he r w a ys t oo. I t w a s a l s o a l l ow e d t o
l e nd m one y t o g ove r nm e nt s t o r e c a pi t a l i s e ba nks a nd e xt e nd pr e c a ut i ona r y
l oa ns .
T he de a l w oul d pr om pt r a t i ngs a ge nc i e s t o de c l a r e a t e m por a r y
“ s e l e c t i ve de f a ul t ” ( t he E F S F w oul d ha ve t o of f e r t he E C B a l t e r na t i ve
c ol l a t e r a l ) , but i t s vol unt a r y na t ur e e ns ur e d i t w oul d not c ount a s a “ c r e di t
e ve nt ” t ha t t r i gge r e d pa ym e nt s of c r e di t – de f a ul t s w a ps , a f or m of
i ns ur a nc e a ga i ns t s ove r e i gn de f a ul t s . H ow e ve r , t he de a l pr ove d t o be t he
w or s t of bot h w or l ds : t he ha i r c ut w a s t oo s m a l l t o t ur n a r ou nd G r e e c e ’ s
publ i c f i na nc e s , but bi g e nough t o s pr e a d f e a r t ha t ot he r bonds w e r e a t
r i s k.
M a r ke t s ha d ot he r r e a s ons t o w or r y . T he or i gi na l ba nki ng c r i s i s ha d
ne ve r be e n s a t i s f a c t or i l y r e s ol ve d; i t ha d onl y be e n m a s ke d by t he G r e e k
t ur m oi l a nd, t o a gr e a t e xt e nt , w or s e ne d by t he s ove r e i gn- de bt c r i s i s . T he
s e c ond r ound of ba nk s t r e s s t e s t s i n J ul y t ur ne d out t o be a n ot he r ha l f –
ba ke d j o b. P l a i n l y , s ove r e i gn bonds c oul d no l onge r be t r e a t e d a s r i s k- f r e e .
B ut onl y t he bonds i n ba nks ’ t r a di ng books w e r e a c c ount e d f or a t m a r ke t
va l ue ; t h os e i n t he ba nki ng books w e r e c ount e d a t f a c e va l ue b e c a us e t he y
w oul d s uppos e dl y be he l d t o m a t ur i t y . A na l ys t s de r i de d t he e f f or t ( onl y 9
out of 90 ba nks t e s t e d w e r e f ound t o r e qui r e a ddi t i ona l c a pi t a l ) , but f or
s e ni or of f i c i a l s , pa r t i c ul a r l y i n F r a nc e , t he t e s t s a l r e a dy w e nt t oo f a r i n
que s t i oni ng t he va l ue of s ove r e i gn bonds . E ve n m or e a l a r m i ng w a s a s ha r p
w a r ni ng by L a ga r de , i n he r f i r s t s pe e c h a s t he ne w I M F c hi e f , de l i ve r e d a t
t he a nnua l c e nt r a l ba nke r s ’ r e t r e a t i n J a c ks on H ol e a t t he e nd of A ugus t ,
w he n s he c a l l e d f or m a nda t or y r e c a pi t a l i s a t i on of ba nks :
B ank s ne e d ur ge nt r e c api t al i s at i on. T he y m us t be s t r ong e nough t o
w i t hs t and t he r i s k s of s ov e r e i gns and w e ak gr ow t h. T hi s i s k e y t o c ut t i ng
t he c hai ns of c ont agi on. I f i t i s not addr e s s e d, w e c oul d e as i l y s e e t he
f ur t he r s pr e ad of e c onom i c w e ak ne s s t o c or e c ount r i e s , or e v e n a
de bi l i t at i ng l i qui di t y c r i s i s .
N i g h t l e t t e r s
I n m a ny w a ys , t he e ur o c r i s i s w a s a l w a ys a bout I t a l y . A c ol l a ps e of t he
t hi r d- l a r ge s t e c onom y i n t he e ur o z one , a nd i t s s e c ond- l a r ge s t de bt or i n

a bs ol ut e t e r m s , w oul d s ur e l y s i nk t he e ur o. S pa i n m a t t e r e d not onl y
be c a us e i t w a s l a r ge r t ha n t he ot he r ba i l e d- out s t a t e s , but a l s o be c a us e i t
w a s t he t he l a s t l i nk i n t he c ha i n of c ont a gi on be f or e I t a l y . T he s i z e of t he
e ur o z one ’ s f i r e w a l l w a s i na de qua t e be c a us e i t c oul d not pr ot e c t I t a l y .
E ur obonds w e r e una c c e pt a bl e be c a us e t he y w oul d m e a n G e r m a ny ha vi ng
t o g ua r a nt e e I t a l y’ s ga r ga nt ua n de bt . A nd t he f e a r of m or a l ha z a r d w a s
a c ut e , i n pa r t be c a us e nobody t r us t e d I t a l i a n pol i t i c i a ns t o r e f o r m . I t a l y a t
l e a s t ha d t he f or e s i ght not t o e nga ge i n f i s c a l s t i m ul us , a nd i t s pr i m a r y
budge t ( t ha t i s , be f or e i nt e r e s t pa ym e nt s ) w a s i n s ur pl us . M or e ove r , i t s
ba nks s e e m e d i n r e a s ona bl e s ha pe , a nd dom e s t i c s a vi ngs w e r e hi gh. E ve n
s o, by t he s t a r t of A ugus t i t s bor r ow i ng c os t s ha d s pi ke d a bove t he 6%
m a r k ( m a t c he d by S pa i n’ s yi e l ds ) . E ve r ybody kne w I t a l y w a s t oo bi g t o
s a ve . O nl y t he E C B c oul d he l p i t s t a y a f l oa t .
O n A ugus t 5t h 2011 I t a l y’ s pr i m e m i ni s t e r , S i l vi o B e r l us c oni , r e c e i ve d
a s t e r n l e t t e r s i gne d j oi nt l y by T r i c he t a nd D r a ghi . I t ur ge d hi m t o t a ke
“ i m m e di a t e a nd bol d” m e a s ur e s t o s pe e d up I t a l y’ s de f i c i t – c ut t i ng a nd
ba l a nc e t he budge t by 2013, a ye a r e a r l i e r t ha n pl a nne d. I t a l s o s e t out a
l i s t of “ s i gni f i c a nt m e a s ur e s t o e nha nc e pot e nt i a l gr ow t h” , i nc l udi ng t he
l i be r a l i s a t i on of pr of e s s i ona l s e r vi c e s a nd m or e l a bour – m a r ke t f l e xi bi l i t y .
I n t he l onge r t e r m t he r e ha d t o be a c ons t i t ut i ona l r e f or m t o e ns hr i ne f i s c a l
r ul e s , a n ove r ha ul of t he publ i c a dm i ni s t r a t i on a nd t he a bol i t i on of c os t l y
l a ye r s o f gove r nm e nt . A s i m i l a r l e t t e r w a s s e nt t o S pa i n’ s pr i m e m i ni s t e r ,
J os é L ui s R odr í gue z Z a pa t e r o, t hough i t s c ont e nt s di d not l e a k f or t w o
ye a r s .
A da y e a r l i e r t he E C B ha d r e vi ve d i t s bond- buyi ng pr ogr a m m e ,
i ni t i a l l y onl y f or P or t uga l a nd I r e l a nd. T he i m pl i e d m e s s a ge w a s c l e a r : i f
I t a l y a nd S pa i n w a nt e d he l p t he y ha d t o r e f or m f a s t , a s i f t he y w e r e unde r
a t r oi ka pr ogr a m m e . A s t he ba nk s t a r t e d buyi ng up unpr e c e de nt e d a m ount s
of S pa ni s h a nd I t a l i a n bonds , J ü r ge n S t a r k, t he G e r m a n c hi e f e c onom i s t on
t he E C B ’ s e xe c ut i ve boa r d, a nnounc e d hi s r e s i gna t i on “ f or pe r s ona l
r e a s ons ” : t ha t i s , hi s di s a ppr ova l of bond- buyi ng. P r e di c t a bl y e nough,
B e r l us c oni s oon s t a r t e d w a t e r i ng dow n hi s pr opos e d a us t e r i t y budge t , a nd
di d vi r t ua l l y not hi ng by w a y of s t r uc t ur a l r e f or m s t o a c c e l e r a t e I t a l y’ s
s c l e r ot i c gr ow t h . H i s gove r nm e nt w a s c r um bl i ng a nd hi s r e l a t i ons hi p w i t h
hi s f i na nc e m i ni s t e r , G i ul i o T r e m ont i , ha d a l l but br oke n dow n. O n
S e pt e m be r 20t h S t a nda r d & P oor ’ s dow ngr a de d I t a l y , e xpr e s s i ng doubt

a bout i t s a bi l i t y t o r e f or m . T he E C B dow ngr a de d i t s i l e nt l y , by s ha r pl y
s l ow i ng dow n bond pur c ha s e s . A m i d m ount i ng s c a nda l s ove r a l l e ga t i ons
of f r a ud a nd w hor e m onge r i ng, t r a de uni ons a nd bos s e s a l i ke c a l l e d f or
B e r l us c oni t o r e s i gn.
T he M e r koz y duo vow e d t o de a l w i t h t he c r i s i s de c i s i ve l y i n t w o
s um m i t s i n O c t obe r ( or r a t he r f our s um m i t s , gi ve n t ha t e a c h w a s s pl i t i nt o
a n E U s um m i t of 27 f ol l ow e d by a e ur o- z one m e e t i ng of 17) . A t t he f i r s t
ga t he r i ng on O c t obe r 23r d, B e r l us c oni w a s gi ve n a n ul t i m a t um t o pr e s e nt
c r e di bl e r e f or m s a t t he ne xt m e e t i ng t hr e e da ys l a t e r . A s ke d a t a pr e s s
c onf e r e nc e w he t he r t he y w e r e r e a s s ur e d by hi s r e s pons e , M e r ke l a nd
S a r koz y he s i t a t e d a bi t t oo l on g, l ooke d a t e a c h ot he r a nd, a s t he r oom
e r upt e d i n l a ught e r , s m i l e d a nd s m i r ke d. I nvol unt a r y , pe r ha ps , but i t w a s a
hum i l i a t i on f or B e r l us c oni a nd a ge s t ur e of no c onf i de nc e i n I t a l y .
O n O c t obe r 26t h t he e ur o z one a nnounc e d ye t a not he r “ c om pr e he ns i ve
s ol ut i on” . I t a l y pr om i s e d t o r e f or m l a bour m a r ke t s a nd pe ns i ons , c ut r e d
t a pe , a b ol i s h m i ni m um c ha r ge s f or pr of e s s i ona l s e r vi c e s a n d m or e . I t
w oul d be s ubj e c t t o s pe c i a l m oni t or i ng by t he C om m i s s i on . A nd a f t e r
a not he r r ound of ne got i a t i ons be t w e e n l e a de r s a nd ba nks , w hi c h ba r e l y
s e e m e d t o i nvol ve t he ha pl e s s P a pa ndr e ou, G r e e k bonds w oul d be s ubj e c t
t o a 50% c ut i n f a c e va l ue ( r e s ul t i ng i n a 76% c ut i n t e r m s of ne t pr e s e nt
va l ue ) . T he a i m w a s t o br i ng G r e e c e ’ s de bt dow n t o 120% of G D P by
2020, a t hr e s hol d c hos e n t o m a t c h I t a l y’ s de bt , w hi c h, by de f i ni t i on, ha d t o
be s ol ve nt .
T o c ont a i n t he i m pa c t , t he e ur o z one ne e de d bi gge r f i r e w a l l s . G e r m a ny
ha d be e n unw i l l i ng t o i nc r e a s e i t s gua r a nt e e s t o t he E F S F a nd m a ny ot he r s
w e r e una bl e t o d o s o, gi ve n t he r i s k t o t he i r c r e di t r a t i ng. F r a n c e f a vour e d
gi vi ng t he E F S F a ba nki ng l i c e nc e , s o t ha t i t c oul d bor r ow f r om t he E C B .
B ut T r i c he t bl oc ke d t he i de a a t a ba d- t e m pe r e d i m pr om pt u m e e t i ng on
O c t obe r 19t h on t he f r i nge s of hi s of f i c i a l f a r e w e l l c e l e br a t i on a t
F r a nkf ur t ’ s ol d ope r a hous e . S o t he s um m i t s e t out t w o opt i ons . T he E F S F
c oul d of f e r “ c r e di t e nha nc e m e n t s ” t o i ns ur e i nve s t or s a ga i ns t pa r t of t he
l os s on s ove r e i gn bonds ; or i t c oul d c r e a t e a s pe c i a l – pur pos e ve hi c l e i n
w hi c h ot he r c ount r i e s w i l l i ng t o he l p E ur ope c oul d i nve s t . L e a de r s a l s o
a gr e e d t o bol s t e r r i c ke t y ba nks by f or c i ng t he m t o f i nd a bout €106 bi l l i on
of e xt r a c a pi t a l by t he e nd of J une 2012 t o m e e t a hi ghe r 9% t hr e s hol d of
“ hi ghe s t qua l i t y c a pi t a l ” , a f t e r m a r ki ng s ove r e i gn de bt t o m a r ke t pr i c e s .

T he de a l w a s s e a l e d w i t h a not he r l a ye r of t he f a vour i t e F r a nc o- G e r m a n
m i x: S a r koz y s e c ur e d a c om m i t m e nt t o hol d t w i c e – ye a r l y e ur o- z one – onl y
s um m i t s w i t h t he opt i on, i n f ut ur e , of ha vi ng a s e pa r a t e pr e s i de nt ; M e r ke l
obt a i ne d s uppor t f or ye t a not he r r e vi s i on of t he t r e a t y a i m e d va gue l y a t
“ s t r e ngt he ni ng e c onom i c c onve r ge nc e w i t hi n t he e ur o a r e a , i m pr ovi ng
f i s c a l di s c i pl i ne a nd de e pe ni ng e c onom i c uni on” . Y e t w i t hi n da ys t he
m a r ke t s w e r e s t r uc k by a not he r bom bs he l l : t he G r e e k pr i m e m i ni s t e r
a nnounc e d on O c t obe r 31s t t ha t he w oul d hol d a r e f e r e ndum t o a ppr ove
t he t e r m s of t he ne w r e s c ue pr ogr a m m e . M a r ke t s t um bl e d. T he E C B
w or r i e d t ha t ba nk r uns w o ul d s t a r t i n G r e e c e . A f t e r t w o ye a r s of c r us hi ng
a us t e r i t y , nobod y c oul d be e xp e c t e d t o vot e f or m or e of i t . G r e e k bond
yi e l ds s hot up, pul l i ng e ve r yone e l s e a l ong ( s e e F i gur e 5.1 ) . I t a l i a n bonds
a ga i n pus he d pa s t t he 6% m a r k. T he e ur o z one w a s c l os e t o br e a ki ng.
FIG 5.1 F r o m c r i s i s t o c r i s i s
Ten-year bond yields, 2010–2012, %
S o u r c e : Thomson Reuters
C a n e d i n C a n n e s
T he s ys t e m of pe e r – pr e s s ur e , s hy a t f i r s t a nd t he n e ve r m or e i ns i s t e nt a s
t he c r i s i s w or s e ne d, r e a c he d i t s l ogi c a l a nd br ut a l c l i m a x a t t he G 20
s um m i t hos t e d by S a r koz y i n C a nne s on N ove m be r 3r d–4t h 2011.
P a pa ndr e ou w a s s um m one d be f or e S a r koz y , M e r ke l a nd l e a de r s of

E ur ope a n i ns t i t ut i ons on t he e ve of t he s um m i t . H e w a s t ol d he ha d s how n
hi m s e l f “ di s l oy a l ” a f t e r f e l l ow l e a de r s ha d w or ke d ha r d t o l i f t a l a r ge
c hunk of de bt of f G r e e c e ’ s s houl de r s . U nt i l G r e e c e a ppr ove d t he ne w
pr ogr a m m e , ne i t he r t he e ur o z o ne nor t he I M F w oul d di s bur s e a c e nt ( pas
un s ou) , s a i d S a r koz y . A nd i f P a pa ndr e ou i ns i s t e d on t he r e f e r e ndum , t he
que s t i on s houl d not be a bout t he t e r m s of t he ba i l out but a bo ut G r e e c e ’ s
m e m be r s hi p of t he e ur o. I f t he c os t of s a vi ng t he e ur o w a s t o l e t G r e e c e
go, s o be i t . P e r h a ps G r e e c e c oul d c om e ba c k i n a f t e r t e n ye a r s , t he F r e nc h
pr e s i de nt s ugge s t e d.
A t a j oi nt pr e s s c onf e r e nc e by S a r koz y a nd M e r ke l t he ul t i m a t um w a s
m a de publ i c : “ D oe s G r e e c e w a nt t o r e m a i n i n t he e ur o z one , or not ? ”
a s ke d S a r koz y . F or t he f i r s t t i m e i n t he c r i s i s , t he pr os pe c t of t he e ur o
br e a ki ng up w a s be i ng ope nl y di s c us s e d by i t s m os t i m por t a nt l e a de r s .
P a pa ndr e ou va c i l l a t e d. H e l e f t C a nne s s a yi ng t he que s t i on w oul d i nde e d be
a bout G r e e c e ’ s f ut ur e i n t he e ur o, but onc e i n A t he ns he de c l a r e d i t w oul d
be a bout t he ba i l – out t e r m s a f t e r a l l . V e ni z e l os , w ho ha d be e n a br oodi ng
pr e s e nc e a t t he e nc ount e r i n C a nne s a nd w a s ur ge d by s om e of t hos e a t t he
m e e t i ng t o he l p s t op t he r e f e r e ndum , m a de hi s m ove : he d e c l a r e d hi s
oppos i t i on t o t he ba l l ot a nd l e d a r e vol t t ha t pr e c i pi t a t e d P a pa ndr e ou’ s
dow nf a l l a w e e k l a t e r .
O n t he m or ni ng of N ove m be r 3r d, i t w a s B e r l us c oni ’ s t ur n t o be
r oa s t e d. S a r koz y a nd W ol f ga ng S c hä ubl e , t he G e r m a n f i na nc e m i ni s t e r
s t a ndi ng i n f or M e r ke l , de m a nde d t ha t I t a l y s houl d a ppl y f or a
pr e c a ut i ona r y l i ne of c r e di t f r om t he I M F . L a ga r de bl unt l y t ol d t he I t a l i a n
pr i m e m i ni s t e r t ha t nobody be l i e ve d hi m . W i t h Z a pa t e r o i n t he r oom , t he
F r e nc h pr e s i de n t not e d w i t h di s a ppoi nt m e nt t ha t a S pa ni s h- s t yl e pol i t i c a l
s ol ut i on – a n e a r l y e l e c t i on i n w hi c h t he pr i m e m i ni s t e r w oul d not s t a nd
a ga i n – w a s not on of f e r i n I t a l y . T he r e w a s a t ouc h of pe r s ona l a ni m os i t y:
S a r koz y bl a m e d B e r l us c oni pe r s ona l l y f or I t a l i a n ne w s pa pe r s ’ a t t a c ks on
t he F r e nc h f i r s t l a dy , t he I t a l i a n- bor n m ode l a nd s i nge r C a r l a B r uni .
F or hi s pa r t , B e r l us c oni s e e m e d de t a c he d f r om t he s e ve r i t y of hi s
pr e di c a m e nt a nd unpr e pa r e d f or t he a s s a ul t ; “ he w a s c om pl e t e l y
de pr e s s e d,” r e c ount e d one w i t ne s s . I t a l y ha d a l w a ys l i ve d w i t h hi gh de bt ,
B e r l us c oni t ol d hi s pe e r s ; i t c oul d s ur vi ve f or a l ong t i m e w i t h hi ghe r
i nt e r e s t r a t e s a nd dom e s t i c s a v e r s c oul d be c ount e d on t o buy bonds . H e
w oul d r e f us e t o t a ke t he I M F ’ s l i ne of c r e di t – doi ng s o w oul d be

t a nt a m ount t o a dm i t t i ng t ha t I t a l y ha d be c om e a not he r G r e e c e , s a i d hi s
of f i c i a l s – but h e w oul d a gr e e t o i nt e ns e m oni t or i ng by t he F und a nd t he
C om m i s s i on. I f B e r l us c oni w a s de f l a t e d i ns i de t he r oom , out s i de he t r i e d
t o br a z e n hi s w a y out of i s ol a t i on. “ T he r e i s no c r i s i s ,” he t ol d j our na l i s t s .
“ T he r e s t a ur a nt s a r e f ul l a nd you c a nnot f i nd a s e a t on t he f l i ght s .”
T he I t a l i a n pr i m e m i ni s t e r s t i l l e nj oye d a de gr e e of unde r s t a ndi ng
f r om a t l e a s t s om e i n t he r oom , i nc l udi ng t he pl a c i d V a n R om puy a nd t he
m or e i r a s c i bl e B a r r os o. B ot h t hought a pr e c a ut i ona r y l i ne of c r e di t w or t h
s om e €8 0 bi l l i on w a s f a r t oo s m a l l t o he l p I t a l y’ s f i na nc e s , a nd w oul d onl y
r a i s e doubt s a bout i t s s ol ve nc y . T ha t ni ght B e r l us c oni a l s o got une xpe c t e d
s uppor t f r om B a r a c k O ba m a , w ho nor m a l l y ha d l i t t l e t i m e f or B e r l us c oni
but on t hi s oc c a s i on s i de d w i t h t he dove s . T he A m e r i c a n pr e s i de nt a l l but
t ook c on t r ol of a s i de m e e t i ng o f E ur ope a n l e a de r s a t t he G 20 s um m i t . H e
ur ge d t h e E ur ope a ns t o a c t de c i s i ve l y , a nd c onc e nt r a t e d hi s e f f or t s on
t r yi ng t o c onvi nc e G e r m a ny t o e nha nc e t he E ur ope a n f i r e w a l l . I f t he E C B
pe r s i s t e d i n r e f us i ng t o i nt e r ve n e i n a n unl i m i t e d m a nne r ( f or e xa m pl e , by
i s s ui ng t he E F S F a ba nki ng l i c e nc e ) , how a bout c ont r i but i ng t he
E ur ope a ns ’ unus e d a l l oc a t i ons of “ s pe c i a l dr a w i ng r i ght s ” ? S D R s a r e
c r e a t e d by t he I M F a s a r e s e r ve a s s e t , a s or t of vi r t ua l gol d, a nd t he i r
s uppl y w a s gr e a t l y boos t e d i n 2 009 t o gi ve c ount r i e s e xt r a l i qu i di t y i n t he
f i na nc i a l c r i s i s . N ow t he t a bl e s w e r e t ur ne d on M e r ke l . T h e i de a w a s
f i r m l y bl oc ke d by t he B unde s ba nk, w hi c h he l d G e r m a ny’ s a l l oc a t i on a nd
r e ga r de d t he i r us e a s t a nt a m ount t o pr i nt i ng m one y . T he G e r m a n
c ha nc e l l or s a i d s he m i ght r e l e nt i f I t a l y a c c e pt e d a n I M F pr e c a ut i ona r y
pr ogr a m m e , but t he i de a di d not f l y . M e r ke l c a m e unde r s uc h c onc e r t e d
pr e s s ur e , s om e of t hos e i n t he r oom r e por t e d, t ha t s he w a s i n t e a r s , s a yi ng:
“ I w a s t he he r o, a nd now I a m t he vi l l a i n.”
G o o d b y e G e o r g e a n d S i l v i o . A n d D a v i d t o o ?
W i t hi n da ys of t he C a nne s s um m i t , t he pr e s s ur e f r om E ur ope , m a r ke t s a nd
i nt e r na l di s s e nt ha d f or c e d bot h G e or ge P a pa ndr e ou a nd S i l vi o B e r l us c oni
t o r e s i gn, on N o ve m be r 8t h a nd N ove m be r 12t h r e s pe c t i ve l y . I n t he i r pl a c e
c a m e t w o t e c hno c r a t i c pr i m e m i ni s t e r s . L uc a s P a pa de m os , gov e r nor of t he
G r e e k c e nt r a l ba nk a nd a f or m e r vi c e – pr e s i de nt of t he E C B , w a s a ppoi nt e d
i n A t he n s . M a r i o M ont i , a f or m e r E ur ope a n c om m i s s i one r , w a s i ns t a l l e d

i n R om e . B ot h w e r e c hos e n, w i t h a pr i va t e nod f r om B r us s e l s , f or t he i r
c l os e l i nks t o E ur ope a n pol i c ym a ke r s . T he i r m a i n t a s k w a s t o r e s t or e t he
c r e di bi l i t y of t he i r c ount r i e s be f or e t he i r E ur ope a n pe e r s a nd t he f a c e l e s s
m a r ke t s . I nde e d , t he a r r i va l of t he t e c hnoc r a t s m a y ha ve s a ve d t he i r
c ount r i e s f r om i m m i ne nt e c onom i c di s a s t e r . B ut t hough t he y w e r e c a l l e d
upon t o c l e a n u p t he m e s s c r e a t e d by t he pol i t i c i a ns , a nd e ndor s e d i n
pa r l i a m e nt a r y vot e s , t he m a nn e r of t he i r a ppoi nt m e nt l e f t a pr of ound
w or r y a bout de m oc r a c y i n E ur o pe : a s w e l l a s di c t a t i ng e c onom i c pol i c i e s ,
E ur ope w a s now , di r e c t l y or i n di r e c t l y , di c t a t i ng t he c hoi c e of pol i t i c a l
l e a de r s .
P a pa de m os a nd M ont i c oul d not , on t he i r ow n, de a l w i t h a m a r ke t
c r i s i s t h a t w a s c or r odi ng t he e nt i r e e ur o z one . G i ve n t he f a i l ur e of t he
C a nne s s um m i t t o bol s t e r t he f i r e w a l l , t he l a s t l i ne of de f e nc e w a s now t he
E C B . A l l e ye s t ur ne d t o t he ne w m a n i n F r a nkf ur t , M a r i o D r a ghi .
A ppe a r i ng f or t he f i r s t t i m e be f or e t he E ur ope a n P a r l i a m e nt on D e c e m be r
1s t , he s poke op a que l y a bout t he a dvi s a bi l i t y of a “ f i s c a l c om pa c t ” , s om e
ki nd of a ddi t i ona l c om m i t m e n t t o budge t a r y di s c i pl i ne . T he e f f e c t s of
pr e vi ous r e f or m s a nd of t he a r r i va l of t e c hnoc r a t s i n I t a l y a nd G r e e c e w e r e
not ye t be i ng f e l t , he e xpl a i ne d. A c om pa c t e ns hr i ni ng ne w ba l a nc e d-
budge t r ul e s i n a m or e f or m a l f r a m e w or k w oul d s e nd a n a ddi t i ona l s i gna l
of c r e di bi l i t y . H e t hus a l l i e d hi m s e l f t o G e r m a ny’ s c a us e f or ye t a not he r
t r e a t y c ha nge .
T he i de a of a r e vi s i on hor r i f i e d j us t a bout e ve r ybody – e ve n t hos e
out s i de t he e ur o z one . F or D a vi d C a m e r on, t he B r i t i s h pr i m e m i ni s t e r , t he
i de a of a t r e a t y r e vi s i on w a s bound t o s t i r hi s i nc r e a s i n gl y r e s t i ve
ba c kbe nc he r s t o de m a nd t ha t he us e t he oppor t uni t y t o w i n s om e t hi ng f or
t he U K . C a m e r on’ s di pl om a t i c c a m pa i gn w a s i l l – pr e pa r e d, pa r t i c ul a r l y i n
hi s m i s r e a di ng of M e r ke l . H i s of f i c i a l s di d not s pe l l out t he U K ’ s de m a nds
– e s s e nt i a l l y t he pr ot e c t i on of t he C i t y of L ondon f r om ne w E U f i na nc i a l
r e gul a t i on – unt i l t he e ve of t h e D e c e m be r s um m i t . T he B r i t i s h ha d be e n
l ul l e d by E U l e g a l e xpe r t s i nt o be l i e vi ng t ha t t he e ur o z one c oul d not ge t
a r ound a U K ve t o. B ut w he n t he c r unc h c a m e i n t he s m a l l hour s of
D e c e m be r 9t h, C a m e r on’ s a t t e m pt t o ve t o t he ne w f i s c a l c om pa c t t r e a t y
ba c kf i r e d. F i r s t , t he E U ’ s l a w ye r s s a i d t he c om pa c t c oul d, a f t e r a l l , be
a dopt e d a s a s e p a r a t e a gr e e m e n t out s i de t he E U ’ s t r e a t y . S e c o nd, m os t of
t he e ur o “ out s ” s i gne d up t o i t , l e a vi ng t he U K i s ol a t e d. B a c k hom e

C a m e r on w a s br i e f l y ha i l e d a s a c onque r i ng he r o, e ve n t ho ugh he ha d
ve t oe d n ot hi ng a t a l l . S a r koz y b oa s t e d pr i va t e l y t ha t “ w e ga ve t he B r i t i s h a
s l a p i n t he f a c e ” .
D e s p e r a t e t i m e s
T he br ut a l i t y of t he pol i t i c s a t t he e nd of 2011 r e f l e c t e d t he de s pe r a t i on of
t he m om e nt . A f t e r ne a r l y t w o y e a r s of e r r or s a nd m i s s e d oppor t uni t i e s , t he
e ur o w a s c l os e t o br e a ki ng poi nt . I t w a s a ppa r e nt t ha t t he G r e e k ba i l – out
pr ogr a m m e ha d be e n ba dl y m i s j udge d. T he e ur o z one l e a de r s t e nde d t o pi n
t he bl a m e on t he i m pos s i bl e G r e e ks . I f onl y t he y w e r e m or e l i ke t he
s t oi c a l B a l t s a nd j us t got on w i t h c ont r ol l i ng t he i r de f i c i t , s a i d a dvoc a t e s
of h a r d f r ont – l oa de d a us t e r i t y , t he y w oul d ha ve got ove r t he i r pa i n m or e
qui c kl y . L a t vi a ha d s uf f e r e d l a r ge l os s e s of out put , pe gge d i t s c ur r e nc y t o
t he e ur o, s uf f e r e d a ba nki ng bus t a nd ha d t o be ba i l e d out by t he I M F a nd
E ur ope a n C om m i s s i on. Y e t L a t vi a r e j e c t e d t he I M F ’ s a dvi c e t o de va l ue t he
c ur r e nc y , a nd c hos e i ns t e a d t he a gony of i nt e r na l de va l ua t i on. I t
s ubs e que nt l y e m e r ge d a s one of t he f a s t e s t – gr ow i ng c ount r i e s i n t he E U . I n
t he vi e w of i t s l e a de r s , t he ke y i ngr e di e nt w a s pol i t i c a l w i l l . E s t oni a
unde r w e nt a s i m i l a r e xpe r i e nc e . A nd a s i t j oi ne d t he e ur o i n 2011, E s t oni a
i nt e ns e l y r e s e nt e d ha vi ng t o c ont r i but e t o t he ba i l – out of t h e f a r r i c he r
G r e e ks .
I nt e r na l de va l ua t i on i s di f f i c ul t a t t he be s t of t i m e s . T he I M F ’ s de put y
m a na gi ng di r e c t or , N e m a t S ha f i k, onc e m e m or a bl y c om pa r e d t he pr oc e s s
of r e c ove r i ng c om pe t i t i ve ne s s t o pa i nt i ng a hous e :
I f y ou hav e an e x c hange r at e , y ou c an m ov e y our br us h bac k and f or t h.
I f y ou don’ t hav e an e x c hange r at e , y ou hav e t o m ov e t he w hol e hous e .
S uc c e s s f ul a dj us t m e nt r e qui r e s f l e xi bl e l a bour m a r ke t s a nd a n ope n
e c onom y t ha t c a n e xpor t i t s w a y ba c k t o gr ow t h, a s w e l l a s a popul a t i on
w i l l i ng t o put up w i t h t he pa i n. G r e e c e ha d none of t he s e : i t w a s a c l os e d,
r i gi d e c onom y a nd i t s pol i t i c s w a s pol a r i s e d by a hi s t or y of oc c upa t i on,
c i vi l w a r a nd m i l i t a r y r ul e . A s s uc h, G r e e c e w a s t he m os t r e c a l c i t r a nt of
t he e ur o – z one c ount r i e s t o be r e s c ue d. G r e e k l e a de r s , e ve n a s t he y s l a s he d
t he budg e t , di d not unde r s t a nd h ow e xt e ns i ve s t r uc t ur a l r e f or m s ne e de d t o

be , a nd m a de n o pr ogr e s s on pr i va t i s a t i on. I M F e xpe r t s r e t ur ni ng f r om
m i s s i ons t o G r e e c e w e r e i nc r e a s i ngl y a l a r m e d by t he dys f unc t i ona l publ i c
a dm i ni s t r a t i on t he y f ound. A nd t he G r e e k gove r nm e nt w a s not he l pe d by
t he oppor t uni s t i c oppos i t i on t ha t i t ha d t o c ont e nd w i t h f r om t he N e w
D e m oc r a c y pa r t y , w hi c h ha d, a f t e r a l l , r un up t he de f i c i t i n i t s l a s t s t i nt i n
gove r nm e nt .
E ve n s o , i t w a s pl a i n t o a l l t ha t G r e e c e w a s be i ng pus he d i nt o a
r e c e s s i on t ha t w a s f a r de e pe r t ha n a nyone ha d pr e di c t e d. T he s i t ua t i on w a s
a ggr a va t e d by s uc c e s s i ve s t a t i s t i c a l r e vi s i ons t ha t ke pt pus hi ng ba c k t he
c ount r y’ s s t a r t i ng poi nt , a nd t he c r us hi ng l os s of i nve s t or c onf i de nc e
c a us e d by t he gr ow i ng t a l k of G r e e c e l e a vi ng t he e ur o.
T o m a ny , t he D e a uvi l l e ba r ga i n i s t he gr i e vous e r r or t ha t t ur ne d a n
a dm i t t e dl y r i s ky G r e e k pr ogr a m m e i nt o a c a t a s t r ophe . I n r e a l i t y , D e a uvi l l e
w a s onl y pa r t of a w i de r c onf u s i on t ha t gr i ppe d t he E ur ope a ns f r om t he
s t a r t . T he y w e r e i n a m uddl e a bout w he t he r G r e e c e w a s s ol ve nt or bus t ,
a nd t hus va c i l l a t e d ove r how t o de a l w i t h i t s a c c um ul a t e d de bt . T he y f i r s t
c hos e a c om pl e t e ba i l – out ; t he n a t D e a uvi l l e s udde nl y f l i r t e d w i t h t he i de a
of a c r os s – t he – boa r d ba i l – i n of c r e di t or s ; a nd t he n ba c ke d a w a y f r om t he
i de a m or e or l e s s e nt i r e l y . B y J ul y , w he n t he y got a r ound t o c ut t i ng
G r e e c e ’ s de bt , t he ha i r c ut w a s t oo m ode s t a nd c a m e t oo l a t e . M ont hs w e r e
w a s t e d s e e ki ng a “ vol unt a r y” c ont r i but i on f r om pr i va t e c r e di t or s t ha t
w oul d not t r i gge r c r e di t – de f a ul t s w a ps ( C D S ) ; i n t he e nd C D S c ont r a c t s
w e r e pa i d out a n yw a y . T he s a m e unc e r t a i nt y a f f e c t e d t he i r j udgm e nt a bout
t he pa c e of f i s c a l c ons ol i da t i on. T o m a ke t he num be r s f i t w i t hi n t he m one y
m a de a va i l a bl e by t he e ur o z one a nd t he I M F , G r e e c e w a s f or c e d i nt o
e xc e s s i ve l y ha r s h de f i c i t – c ut t i ng ( a nd a t f i r s t ha d t o pa y hi gh r a t e s of
i nt e r e s t ) . I n c ont r a s t w i t h L a t vi a , w hi c h c ut i t s budge t a s i t s m a i n t r a di ng
pa r t ne r s w e r e s t i l l s t i m ul a t i ng t he i r e c onom i e s , G r e e c e w a s t r yi ng t o
c ons ol i da t e i t s budge t w hi l e ot he r s w e r e r e duc i ng de f i c i t s a s w e l l .
C r uc i a l l y , t he B a l t i c s t a t e s a l s o ha d l ow de bt s t o be gi n w i t h; e ve n a f t e r t he
w or s t of i t s r e c e s s i on, L a t vi a ’ s de bt s t ood a t a bout 45% of G D P , l e s s t ha n
ha l f of G r e e c e ’ s a t t he s t a r t of i t s t r oubl e s .
A s obe r a s s e s s m e nt i n M a y 2010 s houl d ha ve j udge d t ha t G r e e c e ’ s de bt
w a s uns us t a i na bl e , a nd t ha t i t w oul d ha ve be e n be t t e r t o c ut t he de bt
s oone r r a t he r t h a n de l a y t he i ne vi t a bl e . T hi s w oul d ha ve r e s ul t e d i n a m or e
r e a l i s t i c pr ogr a m m e , f oc us e d l e s s on a us t e r i t y a nd m or e on s t r uc t ur a l

r e f or m , a nd be t t e r a bl e t o a bs or b t he i ne vi t a bl e pol i t i c a l a nd e c onom i c
bum ps . A t t he t i m e , how e ve r , i t m i ght ha ve be e n di f f i c ul t t o c onvi nc e
G e r m a ny t ha t i t s ba nks ha d t o t a ke l os s e s on G r e e k de bt e ve n a s G e r m a n
t a xpa ye r s w e r e be i ng c a l l e d upon t o l e nd e nor m ous s um s t o G r e e c e . T ha t
s a i d, e v e n a l a r ge de bt w r i t e – of f w oul d not ha ve s pa r e d G r e e c e a pa i nf ul
a dj us t m e nt t o c l os e a budge t d e f i c i t ga p of 15% of G D P a nd a c ur r e nt –
a c c ount de f i c i t of s i m i l a r m a gni t ude .
F udge d a s s e s s m e nt s , uns us t a i na bl e de bt , i na de qua t e f i na nc i ng,
G r e e c e ’ s m a ny pol i t i c a l f a i l ur e s a nd unc e r t a i nt y a bout t he e ur o a l l f e d t he
c ons t a nt f e a r of a c ha ot i c de f a ul t . T he G r e e k de a t h s pi r a l , a nd t he
i nc ohe r e nc e of t he e ur o z one ’ s l e a de r s , t hr e a t e ne d t o t a ke dow n t he w hol e
c ur r e nc y . C ont a gi on t hr e a t e ne d t o br i ng dow n I t a l y , t he s c a r i e s t de bt or of
a l l . E ve n w i t h t he w i l l t o a c t m or e de c i s i ve l y , gove r nm e nt s w oul d ha ve
s t r uggl e d t o f i nd t he m one y t o s t a bi l i s e t he e ur o z one onc e I t a l y s t a r t e d t o
w obbl e . B y t he e nd of 2011, onl y t he c e nt r a l ba nk ha d t he r e s our c e s t o
s t a bi l i s e t he s ys t e m . W ha t w oul d i t t a ke f or i t t o s t a nd a s t he e ur o z one ’ s
l e nde r of l a s t r e s or t ?

6 S u p e r M a r i o
A SPIKED PRUSSIAN MILITARY HELMET , a P i c k e l haube , de c or a t e s M a r i o
D r a ghi ’ s of f i c e on t he 35t h f l oor of t he E ur ot ow e r i n F r a nkf ur t , t he
he a dqua r t e r s of t he E C B . I t w a s a gi f t f r om t he e di t or s of B i l d, a G e r m a n
t a bl oi d ne w s pa p e r , i nt e nde d a s bot h a c om pl i m e nt t o hi s r e put a t i on a s “ t he
m os t G e r m a n” of t he c a ndi da t e s t o r un t he c e nt r a l ba nk ( a f t e r t he
r e s i gna t i on of A xe l W e be r ) a nd a w a r ni ng t o t he f or m e r I t a l i a n c e nt r a l
ba nke r n ot t o l e t dow n hi s gua r d a ga i ns t i nf l a t i on. A s he t ook c ha r ge of t he
E C B a t a t i m e of gr e a t pe r i l f or t he e ur o z one he ha d t o a c t bol dl y , t hough
he kne w he c oul d i l l – a f f or d t o a l l ow a us t e r e nor t he r ne r s t o a c c us e hi m of
t ur ni ng t he E C B , t he he i r t o t he unc om pr om i s i ng B unde s b a nk, i nt o a
E ur ope a n ve r s i on of t he B a nc a d’ I t a l i a .
R e pl a c i ng J e a n- C l a ude T r i c he t i n N ove m be r 2011, D r a ghi br ought a
ne w s t yl e . H i s m e e t i ngs w e r e s hor t e r , he de l e ga t e d m uc h m or e
r e s pons i bi l i t y t o c ol l e a gue s a nd, ha vi ng s pe nt t i m e a t G ol dm a n S a c hs , he
w a s m or e i n t une w i t h m a r ke t s t ha n hi s pr e de c e s s or , a s w e l l a s r a t he r l e s s
s t uf f y . H i s f i r s t a c t i n N ove m be r ( a nd a l s o i n D e c e m be r ) w a s t o r e ve r s e hi s
pr e de c e s s or ’ s m i s j udge d r a t e r i s e s e a r l i e r i n t he ye a r , c a t c hi ng m os t
a na l ys t s by s ur pr i s e . I t w a s a hi nt t ha t , i ns t e a d of be i ng c o m pe l l e d t o
r e s pond t o e ve nt s , he w oul d t r y t o c ha nge t he m a r ke t ’ s e xpe c t a t i ons . T he
f i s c a l c o m pa c t he ha d a s ke d f or a l s o ga ve hi m pol i t i c a l c ove r f or a bol de r
m ove : t h e pr ovi s i on of va s t a m ount s of e m e r ge nc y l i qui di t y f or E ur ope ’ s
ba nki ng s ys t e m , c a l l e d L ong T e r m R e f i na nc i ng O pe r a t i ons ( L T R O ) . B a nks
a nd s ov e r e i gns w e r e f a c i ng a l a r ge r e f i na nc i ng hum p i n 2012 , a nd ba nks

w e r e r unni ng s hor t of c ol l a t e r a l . D r a ghi a c t e d t o pr e ve nt a ny f undi ng
“ a c c i de nt s ” t ha t m i ght be t he s pa r k f or a not he r c r i s i s .
T he f i r s t w a ve of c a s h w a s a n nounc e d j us t be f or e t he D e c e m be r 9t h
s um m i t t ha t e ndor s e d t he f i s c a l c om pa c t . T he s e c ond w a ve w a s r e l e a s e d i n
F e br ua r y 2012. I n a l l , t he E C B pr ovi de d €1 t r i l l i on- w or t h of t hr e e – ye a r
l oa ns a t a 1% i nt e r e s t r a t e , a nd a l s o e a s e d c ol l a t e r a l r e qui r e m e nt s . N i c ol a s
S a r koz y gl e e f u l l y l e t e ve r ybody know t ha t t he ba nks , e s pe c i a l l y i n
s out he r n E ur ope , w oul d us e m uc h of t he m one y t o buy hi gh- yi e l di ng
s ove r e i gn bonds ; i n ot he r w or ds , t hi s w a s bond- buyi ng t hr ough t he ba c k
door of t he ba nks . Y e t t he “ S a r k oz y t r a de ” , a s i t c a m e t o be know n, di d not
s a ve F r a nc e f r om l os i ng i t s A A A r a t i ng f r om S t a nda r d & P oor ’ s ( S & P ) i n
J a nua r y . E i ght ot he r e ur o- z one c ount r i e s w e r e a l s o dow ngr a de d. B y
l e a vi ng G e r m a ny a s i t s onl y A A A – r a t e d e ur o- z one s ove r e i gn w i t h a
“ s t a bl e ” out l ook, S & P de s t r oye d t he s ym bol i c pa r i t y be t w e e n G e r m a ny
a nd F r a n c e . E ur ope ’ s di vi di ng l i ne s hi f t e d f r om t he A l ps a nd t he P yr e ne e s
t o t he R hi ne . M or e ove r , by c ha s t i s i ng s o m a ny , S & P m a de c l e a r t ha t t he
pr obl e m w a s not j us t i ndi vi dua l c ount r i e s , but t he e ur o z one a s a w hol e .
T he O c t obe r s um m i t de a l ha d b e e n i na de qua t e a nd di d not pr ov i de e nough
s uppor t f or t r oubl e d s t a t e s . I t s a i d:1
T he out c om e s f r om t he E U s um m i t on D e c . 9, 201 1, and s ubs e que nt
s t at e m e nt s f r om pol i c y m ak e r s , l e ad us t o be l i e v e t hat t he agr e e m e nt
r e ac he d has not pr oduc e d a br e ak t hr ough of s uf f i c i e nt s i z e and s c ope t o
f ul l y addr e s s t he e ur oz one ’ s f i nanc i al pr obl e m s … W e al s o be l i e v e t hat
t he agr e e m e nt i s pr e di c at e d on onl y a par t i al r e c ogni t i on of t he s our c e
of t he c r i s i s : t hat t he c ur r e nt f i nanc i al t ur m oi l s t e m s pr i m ar i l y f r om
f i s c al pr of l i gac y at t he pe r i phe r y of t he e ur oz one . I n our v i e w , how e v e r ,
t he f i nanc i al pr obl e m s f ac i ng t he e ur oz one ar e as m uc h a c ons e que nc e
of r i s i ng e x t e r nal i m bal anc e s and di v e r ge nc e s i n c om pe t i t i v e ne s s
be t w e e n t he e ur oz one ’ s c or e and t he s o- c al l e d “ pe r i phe r y ” . A s s uc h, w e
be l i e v e t hat a r e f or m pr oc e s s bas e d on a pi l l ar of f i s c al aus t e r i t y al one
r i s k s be c om i ng s e l f – de f e at i ng, as dom e s t i c de m and f al l s i n l i ne w i t h
c ons um e r s ’ r i s i ng c onc e r ns about j ob s e c ur i t y and di s pos abl e i nc om e s ,
e r odi ng nat i onal t ax r e v e nue s .

O ve r t he f ol l ow i ng w e e ks D r a ghi ’ s c a s h w oul d e a s e t he s pa s m . T he
e ur o z on e br e a t he d m or e e a s i l y . B ond yi e l ds f or I t a l y a nd S pa i n dr oppe d
m a r ke dl y , by a bout 250 a nd 90 ba s i s poi nt s r e s pe c t i ve l y be t w e e n J a nua r y
a nd M a r c h. T he l ong- dr a w n- out s e c ond G r e e k ba i l out , w i t h i t s l a r ge
ha i r c ut on pr i va t e l y he l d gove r nm e nt bonds , w a s c onc l ude d i n F e br ua r y
a nd m a r ke t s s e e m e d unc onc e r ne d by t he t r i gge r i ng of c r e di t – de f a ul t s w a ps
t ha t ha d onc e be e n s o f e a r e d.
D r a ghi qui e t l y r e t i r e d T r i c he t ’ s of f i c i a l bond- buyi ng ope r a t i on i n
F e br ua r y . Y e t no s oone r ha d he t ol d B i l d i n M a r c h 2012 t ha t “ t he w or s t i s
ove r ” t h a n t he c r i s i s e nt e r e d a not he r , m or e pe r i l ous pha s e . T he L T R O dr ug
w a s w e a r i ng of f , a nd t he e ur o z one ha d e nt e r e d a doubl e – di p r e c e s s i on a t
t he e nd of 2011, c a us e d i n pa r t by t he pr e vi ous ye a r ’ s t ur m oi l . M a r ke t s ’
c onc e r n s hi f t e d f r om t he de f i c i t t o s hr i nki ng out put , t ha t i s , f r om t he
num e r a t or t o t he de nom i na t or i n t he r a t i o of bor r ow i ng t o G D P .
T h e p a i n i n S p a i n
T hr ough t he c r i s i s t he s pr e a d of a c ount r y’ s bond yi e l ds ove r G e r m a n one s
ha s be e n t he t e m pe r a t ur e c ha r t of t he e ur o z one ’ s s i c kne s s . T he s pr e a d i n
bond yi e l ds be t w e e n I t a l y a nd S pa i n t e l l s i t s ow n s t or y of c om pa r a t i ve
i l l ne s s . B e f or e t he c r e di t c r unc h, I t a l i a n bonds w oul d yi e l d 10–20 ba s i s
poi nt s m or e t ha n S pa ni s h one s . I n J a nua r y 2010 t he l i ne s f l i ppe d, i n pa r t
be c a us e c ons e r v a t i ve I t a l i a n ba nks s e e m e d i n be t t e r s ha pe t ha n S pa ni s h
one s , c r i ppl e d a s t he y w e r e by t he pr ope r t y c r a s h. I n A ugus t 2011, t hough,
I t a l y w a s a ga i n t he r i s ki e r be t a s S i l vi o B e r l us c oni ’ s gove r nm e nt be ga n t o
c ol l a ps e . I n M a r c h 2012, t he or de r w a s i nve r t e d onc e m or e ( s e e F i gur e
6.2 ) .
T he r e w e r e t w o m a i n r e a s ons f or t he l a t e s t s w i t c h. F i r s t , I t a l y’ s M a r i o
M ont i be c a m e t he da r l i ng of E ur ope , f e t e d i n G e r m a ny a nd t he U ni t e d
S t a t e s a l i ke . M o nt i , s om e of f i c i a l s s a i d, w a s I t a l y’ s r e a l f i r e w a l l . I n S pa i n,
m e a nw hi l e , doubt s s pr e a d a bou t t he c r e di bi l i t y of t he ne w c ons e r va t i ve
gove r nm e nt of M a r i a no R a j oy , e ve n t hough i t ha d be e n r e s oundi ngl y
e l e c t e d i n N ove m be r 2011 on a pr om i s e of t ough de f i c i t – c ut t i ng a nd
s t r uc t ur a l r e f or m s . S e c ond, S pa i n’ s e c onom y a nd i t s ba nks w e r e t a ki ng a
t ur n f or t he w or s e .

I n l a t e F e br ua r y S pa i n a nnounc e d i t w oul d m i s s i t s 2011 de f i c i t t a r ge t
by a s ur pr i s i ngl y w i de m a r gi n, 8 .5% of G D P i ns t e a d of 6% . O n M a r c h 2nd
R a j oy uni l a t e r a l l y c ha nge d t he 2012 t a r ge t t o 5.8% , i ns t e a d of t he E U –
m a nda t e d 4.4% . T ha t he m a de t he a nnounc e m e nt on t he m a r gi ns of a n E U
s um m i t a t w hi c h 25 l e a de r s s i gne d t he f i s c a l c om pa c t r e c om m i t t i ng
gove r nm e nt s t o budge t di s c i pl i ne , i nf or m i ng nobody of hi s m ove , c a us e d
m uc h i r r i t a t i on ; a f e e l i ng he i ght e ne d by t he f a c t t ha t h e w i t hhe l d
publ i c a t i on of hi s 2012 budge t unt i l a f t e r a r e gi ona l e l e c t i on i n A nda l us i a
t o be he l d a t t he e nd of t he m ont h ( hi s pa r t y l os t a nyw a y) .
S pa i n’ s w oe s c a us e d a de e pe r r e t hi nk a m ong E ur ope a n pol i c ym a ke r s .
S pa i n ga ve s t r ong c a us e t o que s t i on t he di a gnos i s of t he e ur o’ s pr obl e m s .
T hi s w a s not a c a s e of pr of l i ga c y , a s i n G r e e c e , or r e c kl e s s “ A ngl o- S a xon”
c a pi t a l i s m , a s i n I r e l a nd. S pa i n ha d r un a budge t s ur pl us be f or e t he c r i s i s
a nd ha d boa s t e d of ha vi ng one of t he be s t f i na nc i a l r e gul a t or y s ys t e m s .
M or e ove r , S pa i n’ s pe r s i s t e nt budge t de f i c i t r a i s e d que s t i ons a bout t he
f a vour e d pr e s c r i pt i on of ha r d, f r ont – l oa de d a us t e r i t y . I n A pr i l t he I M F
publ i s he d t he f i r s t of a s e r i e s of s t udi e s s ugge s t i ng t ha t f i s c a l m ul t i pl i e r s ,
w hi c h m e a s ur e how ba dl y gr ow t h w oul d be a f f e c t e d by budge t a us t e r i t y ,
w e r e l a r ge r t ha n e xpe c t e d i n c i r c um s t a nc e s , s uc h a s t hos e of t he e ur o z one ,
i n w hi c h i nt e r e s t r a t e s w e r e c l os e t o z e r o, c r e di t w a s t i ght a nd
ne i ghbour i ng c o unt r i e s w e r e a l l c ut t i ng t he i r de f i c i t s . T he F und ur ge d
e ur o- z one c ount r i e s t o s l ow t he pa c e of f i s c a l c ons ol i da t i on.
A bove a l l , t he a l a r m i ng s t a t e o f S pa i n’ s ba nks hi ghl i ght e d a f a c e t of
t he c r i s i s t ha t ha d be e n s e m i – ne gl e c t e d: t he ba nki ng c r i s i s of 2009, m a s ke d
by t he p a ni c ove r s ove r e i gn de bt , ha d not be e n r e s ol ve d. I n f a c t t he t w o
w e r e i nt e r c onne c t e d. I n G r e e c e t he ba nkr upt s ove r e i gn w a s br i ngi ng dow n
t he ba nks . I n I r e l a nd, a nd i n c r e a s i ngl y now S pa i n, bus t ba nks w e r e
e nda nge r i ng t he s ove r e i gn. T he out f l ow of c a pi t a l t ha t S pa i n ha d s uf f e r e d
f r om t he s um m e r of 2011 a br upt l y a c c e l e r a t e d pa c e i n M a r c h 2012.
S pa i n’ s f i na nc i a l r e gul a t or ha d pr ove d una bl e or unw i l l i ng t o c l e a n up
ba nks w r e c ke d by ba d pr ope r t y l oa ns . A c r os s t he e ur o z one , a nd be yond,
ba nki ng w a s one of t he l a s t ba s t i ons of pr ot e c t i on w i t hi n t he E U .
R e gul a t or s t r e a t e d ba nks a s na t i ona l c ha m pi ons . T he y w e r e r e l uc t a nt t o
r e ve a l l o s s e s , e i t he r f or l a c k o f m one y t o r e c a pi t a l i s e ba nks , or f or f e a r
t ha t t he y w oul d be t a ke n ove r b y f or e i gne r s . O f t e n gove r nm e nt s w a nt e d t o
a voi d r e s c ue d ba nks be i ng f or c e d t o di ve s t t he m s e l ve s of a s s e t s unde r

s t a t e – a i d r ul e s de s i gne d t o pr e s e r ve f a i r c om pe t i t i on. B y m i d- 2012, s a y E U
of f i c i a l s , na t i on a l r e gul a t or s ha d ove r e s t i m a t e d ba nk a s s e t s i n a l m os t a l l
c a s e s t he C om m i s s i on ha d i nve s t i ga t e d, pr oba bl y i n a n a t t e m pt t o m a s k
t he s c a l e of publ i c a s s i s t a nc e . R e pe a t e d s t r e s s t e s t s c onduc t e d by t he
E ur ope a n B a nki ng A ut hor i t y ha d be e n di s c r e di t e d: i n J ul y 201 1 i t ga ve a
c l e a n bi l l of he a l t h t o D e xi a , a F r e nc h- B e l gi a n gr oup t ha t w a s ba i l e d out i n
O c t obe r 2011, a nd t o S pa i n’ s B a nki a , pa r t – na t i ona l i s e d i n M a y 2012. T he
L T R O m one y ha d pr ovi de d br i e f r e l i e f , but by e nc our a gi ng b a nks t o buy
m or e bonds ha d w or s e ne d t he de a dl y f e e dba c k l oop.
FIG 6.1 T h e d e a d l y e m b r a c e
Spain: five-year CDS premiums on sovereign and bank debt, 2007–
12
S o u r c e s : Thomson Reuters; Silvia Merler and Jean Pisani-Ferry, Bruegel
I n s u m , S pa i n pr ovi de d s t r ong e vi de nc e t ha t t he pr obl e m w a s not j us t
t he be ha vi our of i ndi vi dua l c ount r i e s , or t he e nf or c e m e nt of f i s c a l r ul e s .
I ns t e a d, i t w a s pr ope r t y bubbl e s , i m ba l a nc e s a nd t he uns t a bl e s t r uc t ur e of
t he e ur o z one . I nde e d, t he e u r o z one f ound i t s e l f i n t he gr i p of t hr e e
s e pa r a t e c r i s e s – ba nki ng, s ove r e i gn de bt a nd gr ow t h – w i t h e a c h
c onne c t e d t o t he ot he r t hr ough de s t a bi l i s i ng f e e dba c k l oops . F i gur e 6.1
s how s how pr e m i um s f or c r e di t – de f a ul t s w a ps f or S pa ni s h s ove r e i gn bonds
a nd S pa ni s h ba nks c l os e l y f ol l ow e d e a c h ot he r . W e a k ba nks e nda nge r e d
s ove r e i gns t ha t w e r e c a l l e d upon t o s a ve t he m , a nd w e a k s ove r e i gns

e nda nge r e d ba nk s hol di ng bonds a t r i s k of de f a ul t . R e c e s s i on w or s e ne d t he
de bt r a t i o, but a us t e r i t y t o r e du c e bor r ow i ng s uppr e s s e d gr ow t h, or c a us e d
e ve n w or s e r e c e s s i on. F e de r a l gove r nm e nt s a t t e nua t e s uc h doom – l oops by
pr ovi di ng f i s c a l t r a ns f e r s ( f or e xa m pl e , t hr ough une m pl oym e nt be ne f i t s )
a nd de a l i ng w i t h s hoc ks t o t he f i na nc i a l s ys t e m . B ut t he e ur o z one ha d no
budge t or c e nt r a l a ut hor i t y .
O ne r e s pons e w a s gr a dua l l y t o e a s e a us t e r i t y . A l r e a dy t he s e c ond
G r e e k pr ogr a m m e i n F e br ua r y ha d r e l a xe d t he pa c e of f i s c a l c ons ol i da t i on
a nd s of t e ne d r e pa ym e nt t e r m s on ba i l – out l oa ns . I n l a t e M a y , de s pi t e t he
i r r i t a t i on w i t h R a j oy’ s a nt i c s , t h e C om m i s s i on ga ve S pa i n a n e xt r a ye a r t o
m e e t i t s de f i c i t t a r ge t of 3% of G D P by 2014, i ns t e a d of 2013. I n J une i t
w a s gi ve n a pa r t i a l ba i l – out w he n f i na nc e m i ni s t e r s a gr e e d i n pr i nc i pl e t o
l e nd i t up t o €100 bi l l i on t o he l p c l e a n up a nd r e c a pi t a l i s e i t s ba nks .
U nl i ke G r e e c e , S pa i n w a s gi v e n onl y “ l i ght ” c ondi t i ons , a nd t he s um
i nc l ude d a ge ne r ous s a f e t y m a r gi n t o a ddr e s s unf or e s e e n ne e ds . B ut t he
de a l ha d l i t t l e i m pa c t on bor r ow i ng c os t s . A nd now S pa i n’ s t r oubl e s w e r e
onc e a ga i n pus hi ng up I t a l y’ s bond yi e l ds .
E u r o p e à I ’ H o l l a n d a i s e
T he e l e c t i on on M a y 6t h 2012 of a S oc i a l i s t pr e s i de nt i n F r a nc e , F r a nç oi s
H ol l a nde , w ho ha d c a m pa i gne d on a n a nt i – a us t e r i t y pl a t f or m , w a s gr e e t e d
w i t h m i xe d f e e l i ngs : hope t ha t t he M e r koz y di kt a t w oul d e n d, but a l s o
w or r y t h a t t he unt e s t e d M e r khol l a nde m i ght l e a d t o pa r a l ys i s or w or s e .
T he r e w a s not m uc h of a hon e ym oon. O n t he s a m e da y , G r e e k vot e r s
c r us he d bot h m a i n c e nt r i s t pa r t i e s , t he c e nt r e – r i ght N e w D e m oc r a c y a nd
e s pe c i a l l y t he S oc i a l i s t P a s ok. T he ol d gi a nt s ba r e l y m us t e r e d 30% of t he
vot e be t w e e n t he m . I t w a s , i n a s e ns e , a s i f t he a bor t i ve r e f e r e ndum t ha t
c os t G e or ge P a pa ndr e ou hi s j ob ha d be e n he l d a f t e r a l l . B ut ha vi ng
e xpr e s s e d t he i r r e vul s i on w i t h t he pol i t i c a l e l i t e , G r e e k vot e r s w e r e l e s s
c l e a r a bout w ha t s houl d r e pl a c e i t . V ot e s w e r e s c a t t e r e d a m ong a nt i –
a us t e r i t y f a c t i ons r a ngi ng f r om t he S t a l i ni s t l e f t t o t he ne o- N a z i r i ght . A
s e c ond b a l l ot w a s c a l l e d i n J un e t o br e a k t he s t a l e m a t e , a m i d hope s t ha t
t he G r e e ks w oul d be ha ve r a t he r l i ke t he F r e nc h: vot i ng w i t h t he i r he a r t s i n
t he f i r s t r ound but w i t h t he i r he a ds i n t he s e c ond.

H ol l a nde s oon c a s t hi m s e l f a s t he c ha m pi on of t he s out h. H i s pr om i s e
t o r e ne got i a t e t he f i s c a l c om pa c t w a s f obbe d of f w i t h a “ gr ow t h c om pa c t ”
t ha t w a s l i t t l e m or e t ha n a r e pa c ka gi ng of s e ve r a l m ode s t a nd p r e – e xi s t i ng
E ur ope a n s pe ndi ng i ni t i a t i ve s . H e a l s o r e vi ve d t he i de a of E ur obonds . I t
w a s unf a i r t ha t S pa i n ha d t o bor r ow a t 6% w hi l e G e r m a ny c oul d do s o
a l m os t f r e e of i nt e r e s t , s a i d H ol l a nde a t a n i nf or m a l E U s um m i t t o
w e l c om e hi m on M a y 23r d. B ut A nge l a M e r ke l w oul d not he a r of de bt
m ut ua l i s a t i on. T ha t e ve ni ng H e r m a n V a n R om puy a ppoi nt e d hi m s e l f t o
w r i t e a r e por t w i t h a va gue r e m i t t o f i nd w a ys of de e pe ni ng e ur o- z one
i nt e gr a t i on. I t w oul d l ook not onl y a t E ur obonds but a l s o, c r uc i a l l y , a t
“ m or e i nt e gr a t e d ba nki ng s upe r vi s i on a nd r e s ol ut i on, a nd a c om m on
de pos i t – i ns ur a nc e s c he m e ” .
T he i de a of a “ b a nki ng uni on” , a s a n a l t e r na t i ve t o t he “ f i s c a l uni on”
pus he d by F r a nc e , w a s t hus t a ki ng s ha pe a s a r e s pons e t o t he S pa ni s h
c r i s i s . E c onom i s t s ha d l ong a r gue d t ha t , i n a n i nt e gr a t e d f i na n c i a l m a r ke t ,
c e nt r a l i s e d E ur ope a n a ut hor i t i e s s houl d be r e s pons i bl e f or s upe r vi s i ng
ba nks a nd f or w i ndi ng t he m up w he n t he y f a i l e d. I n F e br ua r y 2 011 a pa pe r
by B r ue ge l , a B r us s e l s t hi nk- t a nk, de c l a r e d t ha t “ not hi ng l e s s t ha n
s upr a na t i ona l ba nki ng s upe r vi s i on a nd r e s ol ut i on bodi e s c a n ha ndl e t he
ki nd of f i na nc i a l i nt e r de pe nde nc e t ha t now e xi s t s i n E ur ope ” . S uc h i de a s
ha d be e n c ons i de r e d f or J a c que s de L a r os i è r e ’ s r e por t on f i na nc i a l
r e gul a t i on i n F e br ua r y 2009, b ut w e r e de e m e d t oo a m bi t i ous . T he ne w
E ur ope a n s upe r vi s or y a ut hor i t i e s – t hr e e ne w r e gul a t or s f or ba nks ,
i ns ur a nc e a nd m a r ke t s , a nd t he E ur ope a n S ys t e m i c R i s k B oa r d t o m oni t or
t hr e a t s t o t he ove r a l l f i na nc i a l s ys t e m – t ha t e m e r ge d f r om t he r e por t w e r e
l i t t l e m or e t ha n l oos e c o- or di na t i ng bodi e s .
A s e pa r a t e but r e l a t e d i de a w a s t he di r e c t r e c a pi t a l i s a t i on of t r oubl e d
ba nks b y t he E F S F or t he f ut ur e E S M , t o a voi d t he bur de n f a l l i ng on
vul ne r a bl e s ove r e i gns . T he c on c e pt ha d be e n pus he d by t he I M F i n J ul y
2011. F r a nc e ha d a l s o w a nt e d t o dr a w on t he E F S F t o r e c a pi t a l i s e D e xi a i n
O c t obe r 2011 but ha d be e n t ur n e d dow n. I n A pr i l 2012 t he I M F r e t ur ne d t o
t he c ha r ge , t hi s t i m e w i t h a m or e de t a i l e d l onge r – t e r m pr opos a l f or a
s i ngl e E ur ope a n s upe r vi s or w i t h a s i ngl e r e s ol ut i on a ut hor i t y a nd f und,
a nd a E ur ope – w i de de pos i t – gu a r a nt e e s c he m e . B y t he e nd o f M a y t he
c hor us o f s uppo r t e r s f or “ ba nki ng uni on” gr e w l oude r , a s t he E C B a nd t he
C om m i s s i on j oi ne d i n. U nde r t he de l i be r a t e l y unde r s t a t e d t i t l e of

“ i nt e gr a t e d f i na nc i a l f r a m e w o r k” , ba nki ng uni on w a s one of t he f our
pi l l a r s of V a n R om puy’ s J une 26t h r e por t on t he f ut ur e of t he e ur o,
a l ongs i de f i s c a l uni on ( i nc l udi n g t i ght e r budge t c ont r ol s a nd a t i m e t a bl e
f or E ur obonds ) , e c onom i c uni on ( c o- or di na t i on of l a bour – m a r ke t a nd ot he r
pol i c i e s ) a nd pol i t i c a l uni on ( t o gi ve de m oc r a t i c l e gi t i m a c y a nd
a c c ount a bi l i t y t o t he ot he r t hr e e pi l l a r s ) .2
T he br e a kt hr ough c a m e a t a s e c r e t m e e t i ng of f i na nc e m i ni s t e r s f r om
G e r m a ny , F r a nc e , I t a l y a nd S pa i n a nd s e ni or E ur ope a n of f i c i a l s , a t t he
S he r a t on H ot e l ne xt t o C ha r l e s de G a ul l e a i r por t i n P a r i s ( f or gr e a t e r
di s c r e t i on) on J une 26t h. T he di s c us s i on f oc us e d on a not he r ol d F r e nc h
de m a nd, t ha t t he f i r e w a l l be boos t e d by gi vi ng t he E S M a ba nki ng l i c e nc e
s o i t c oul d bor r ow f r om t he E C B . C ha ngi ng t a c k, P i e r r e M os c ovi c i , t he
ne w F r e nc h f i na nc e m i ni s t e r , s ugge s t e d di r e c t ba nk r e c a pi t a l i s a t i on by t he
E S M t o he l p S p a i n. H i s G e r m a n c ount e r pa r t , W ol f ga ng S c hä ub l e , c a us e d a
s t i r w he n he s ugge s t e d i t m i ght be pos s i bl e – but onl y i f t he r e w e r e di r e c t
s upe r vi s i on of ba nks . T hi s w a s i n l i ne w i t h G e r m a ny’ s m a n t r a : gr e a t e r
s ol i da r i t y c oul d onl y c om e w i t h gr e a t e r c ont r ol . B ut w oul d M e r ke l a gr e e
t o a ny of t hi s ?
T w o S u p e r M a r i o s
T he E ur ope a n f oot ba l l c ha m pi o ns hi p, i n w hi c h I t a l y m e t G e r m a ny i n t he
s e m i – f i na l a t t he na t i ona l s t a di um i n W a r s a w on J une 28t h 2012, be c a m e a
m e t a phor f or t he pol i t i c a l ba t t l e t a ki ng pl a c e t he s a m e ni ght i n B r us s e l s :
nor t h a nd s out h, di s c i pl i ne a ga i ns t gui l e , c r e di t or s ve r s us de bt or s . T he
f oot ba l l – m a d M e r ke l w oul d s t e p out of t he m e e t i ng r oom t o w a t c h r e pl a ys
of ke y m om e nt s , s uc h a s M a r i o B a l ot e l l i ’ s w i nni ng goa l f or I t a l y i n t he
36t h m i nut e . I n t he s um m i t s he w a s c onf r ont e d by a not he r S upe r M a r i o,
t he I t a l i a n pr i m e m i ni s t e r , M a r i o M ont i . H i s ga m e w a s a f or m of
c at e nac c i o, t he unyi e l di ng I t a l i a n de f e nc e , pl a ye d w i t h hi s S pa ni s h
c ol l e a gue . T he y s t ubbor nl y bl oc ke d a gr e e m e nt on t he f i na l c om m uni qué ,
i nc l udi ng H ol l a nde ’ s “ gr ow t h pa c t ” , unt i l t he c ha nc e l l or ha d a gr e e d t o
t he i r de m a nds . R a j oy w a nt e d t he di r e c t r e c a pi t a l i s a t i on of S pa ni s h ba nks
by t he E F S F ; M ont i w a nt e d a n a ut om a t i c m e c ha ni s m t o he l p br i ng dow n
t he bor r ow i ng c os t s of vul ne r a bl e but “ vi r t uous ” c ount r i e s ( t ha t i s , I t a l y) .

F or I t a l y , i n pa r t i c ul a r , t hi s w a s a n unus ua l c ha nge of be ha vi our .
B e r l us c oni , t hou gh dom i na nt f or ye a r s i n dom e s t i c pol i t i c s , t ypi c a l l y s a i d
ve r y l i t t l e a t E u r ope a n s um m i t s . N ow t he t e c hnoc r a t w ho ha d s uc c e e de d
hi m w a s da r i ng t o pl a y ha r d ba l l a ga i ns t t he m i ght y G e r m a ns . T he
di f f e r e nc e , pe r h a ps , w a s dow n t o t he f a c t t ha t I t a l y unde r M ont i ha d
r e ga i ne d s om e c r e di bi l i t y , a nd t he r e f or e s om e r oom f or m a no e uvr e . W i t h
s om e s k i l f ul bur e a uc r a t i c m i df i e l d pl a y by s e ni or of f i c i a l s i n B r us s e l s ,
M ont i a nd R a j oy got t he i r w a y a t a r ound 4a m , ha vi ng ove r c om e a
s us t a i ne d r e a r gua r d a c t i on by F i nl a nd a nd t he N e t he r l a nds ( one s e ni or
e ur o- z one of f i c i a l c a l l e d t he s e l a s t t w o e m m e r de ur s , a f r ui t y F r e nc h w or d
t ha t t r a ns l a t e s r oughl y a s “ pa i ns i n t he a r s e ” .)
T hus t he ope ni ng s e nt e nc e of t he e ur o- z one s t a t e m e nt de c l a r e d
gr a ndl y: “ W e a f f i r m t ha t i t i s i m pe r a t i ve t o br e a k t he vi c i ous c i r c l e
be t w e e n ba nks a nd s ove r e i gns .”3 L e a de r s a gr e e d t o s e t up a s i ngl e
s upe r vi s or , ba s e d a t t he E C B , t o ove r s e e t he e ur o z one ’ s 6,000- odd ba nks .
T he r e a f t e r , t he r e s c ue f unds c oul d be us e d t o r e c a pi t a l i s e t r oubl e d ba nks
di r e c t l y . I r e l a nd w a s a l s o pr om i s e d uns pe c i f i e d he l p, i n t a c i t r e c ogni t i on
t ha t i t ha d be e n f or c e d t o t a ke on m uc h of i t s ba nks ’ de bt s . T he s e c ond
c onc e s s i on w a s t o a l l ow t he E F S F , a nd i n f ut ur e t he E S M , t o i nt e r ve ne t o
s t a bi l i s e bond m a r ke t s f or m e m be r s r e s pe c t i ng a l ong l i s t o f E ur ope a n
c om m i t m e nt s w i t hout a f ul l – bl ow n t r oi ka – m oni t or e d pr ogr a m m e .
R a j oy pr oba bl y s c or e d t he w i nni ng goa l on t he ni ght , but M ont i w a s
t he pl a y m a ke r . H e c e r t a i nl y a c t e d a s t he vi c t or , a s he e m e r ge d f r om t he
s um m i t s pe a ki n g t e a s i ngl y a bout “ m a ny i m por t a nt di s c us s i ons , s om e t i m e s
t e ns e , w i t h m a ny e m ot i ona l a s pe c t s , of t e n c onc e nt r a t e d on f oot ba l l ” ; hi s
s uppor t e r s w oul d l a t e r s a y t ha t a n obl i que r e f e r e nc e i n t he c om m uni que t o
t he E C B ’ s r ol e a s a n “ a ge nt ” f or bond- buyi ng by t he r e s c ue f unds w a s t he
ha r bi nge r of a bi gge r r ol e f or t he E C B . A c r os s E ur ope , ne w s p a pe r s c oul d
not r e s i s t pa r a l l e l s be t w e e n G e r m a ny’ s de f e a t i n E ur ope a n f oot ba l l a nd
M e r ke l ’ s c onc e s s i on i n E ur ope a n pol i t i c s . P r o- B e r l us c oni pa pe r s , no f a ns
of M ont i , w e r e pa r t i c ul a r l y c r ude . O ne s how e d B a l ot e l l i ki c ki ng a f oot ba l l
i n t he s ha pe of M e r ke l ’ s he a d; a not he r s pl a s he d w i t h t he he a dl i ne “ C i ao,
C i ao C ul ona” ( “ B ye B ye F a t A r s e ” ) , a r e f e r e nc e t o a n i nt e r c e pt e d phone
c a l l i n w hi c h B e r l us c oni i s a l l e ge d ha ve de s c r i be d t he G e r m a n c ha nc e l l or
i n pa r t i c ul a r l y c r ude t e r m s .4

T he e ur o z one w a s c r os s i ng a n i m por t a nt t hr e s hol d: r e s pons i b i l i t y f or
t he b a nks m i ght now be s ha r e d. S om e E U of f i c i a l s s poke of t he s um m i t a s
t he m os t i m por t a nt a c t of i nt e gr a t i on s i nc e t he M a a s t r i c ht t r e a t y . O f i t s e l f ,
t he c r e a t i on of a s i ngl e s upe r vi s or w oul d a m ount t o a s ubs t a nt i a l s ur r e nde r
of na t i o na l s ove r e i gnt y . T he c ha nge w oul d be gr e a t e r s t i l l i f a nd w he n
ot he r pi l l a r s of ba nki ng uni on w e r e c r e a t e d: a e ur o- z one r e s ol ut i on
a ut hor i t y w i t h a c c e s s t o a c om m on pot of m one y t o w i nd up b us t ba nks ; a
s i ngl e d e pos i t – gua r a nt e e s c he m e ; a nd a c om m on f i s c a l ba c ks t op. T he U S
F e de r a l D e pos i t I ns ur a nc e C or p or a t i on ( F D I C ) i s s e t up a l ong s uc h l i ne s ,
a bl e t o dr a w on a l i ne of c r e di t f r om t he T r e a s ur y i f ne c e s s a r y . F r om t he
s t a r t of t he f i na nc i a l c r i s i s t o t h e e nd of 2013, i t ha s w ound up m or e t ha n
400 ( m o s t l y s m a l l ) ba nks , i n c o nt r a s t w i t h a ha ndf ul i n E ur ope ( a nd a bout
40 b a nks t ha t ha ve r e c e i ve d s t a t e a i d) . M e r ke l m a y ha ve t ol d m e m be r s of
he r c oa l i t i on t ha t s he c oul d n ot e nvi s a ge w hol e s a l e E ur obonds i n he r
l i f e t i m e . B ut j oi nt l i a bi l i t y of a di f f e r e nt f or m m i ght now c om e vi a t he
ba c k door of t he ba nks . I n t he e nd, t he ne e d f or t a xpa ye r s u l t i m a t e l y t o
s t a nd be hi nd t he ba nki ng s ys t e m m e a ns t ha t a r e a l ba nki ng uni on w oul d
be c om e a s t e p t ow a r ds a f i s c a l uni on.
S t i l l n o t e n o u g h
Y e t t he e uphor i a i n t he m a r ke t s w a s s hor t – l i ve d. P a r t of t he bl a m e l i e s w i t h
E ur ope a n l e a de r s ’ l ove of bi c ke r i ng. T he D ut c h pr i m e m i ni s t e r , M a r k
R ut t e , t r i e d t o pe g ba c k M ont i ’ s e xube r a nc e , i ns i s t i ng c ount r i e s w oul d s t i l l
f a c e c ondi t i ons i f he l pe d by t h e f und. F i nl a nd de m a nde d c ol l a t e r a l , a nd
l a t e r s e e m e d t o m us e a bout l e a vi ng t he e ur o ( of f i c i a l s s a i d c om m e nt s t o
t hi s e f f e c t by J ut t a U r pi l a i ne n, t he f i na nc e m i ni s t e r , ha d be e n
m i s t r a ns l a t e d) . G e r m a ny put out t he m e s s a ge t ha t , e ve n i n t he c a s e of
di r e c t r e c a pi t a l i s a t i on, na t i ona l gove r nm e nt s w oul d be l i a bl e f or a ny
ba nki ng l os s e s . A nd t he r e w a s a not he r w or r y . G e r m a ny’ s c ons t i t ut i ona l
c our t w a s due t o de l i ve r i t s ve r di c t on t he l e ga l i t y of t he pe r m a ne nt ne w
r e s c ue f und, t he E ur ope a n S t a bi l i t y M e c ha ni s m , i n S e pt e m be r . A ne ga t i ve
de c i s i on w oul d r e m ove t he e ur o z one ’ s s a f e t y ne t , i na de qua t e a s i t m a y
ha ve be e n. M or e ba d ne w s c a m e f r om M oody’ s , a r a t i ngs a g e nc y , w hi c h
a nnounc e d i t ha d pl a c e d t he A A A c r e di t r a t i ng of G e r m a ny , t he
N e t he r l a nds a nd L uxe m bour g on “ ne ga t i ve out l o ok” be c a us e of t he da nge r

of f i na n c i a l i ns t a bi l i t y i f G r e e c e l e f t t he e ur o, a nd t he pos s i bl e c os t s of
he l pi ng S pa i n a nd I t a l y .5
O n t op of t hi s w a s t he c hr oni c , s e e m i ngl y i ns ol ubl e pr obl e m of G r e e c e .
D e s pi t e t w o ba i l – out s , t w o r ounds of de bt r e s t r uc t ur i ng a nd, a s i n I t a l y , t he
a ppoi nt m e nt of a t e c hnoc r a t t o he a d t he gove r nm e nt , G r e e c e ne e de d s t i l l
m or e bi l l i ons t o a voi d de f a ul t . A l l a t t e m pt s a t r e f or m ha d c om e t o a ha l t
dur i ng t he G r e e k e l e c t i on c a m pa i gn. T he s e c ond ba l l ot on J une 17t h
a l l ow e d A nt oni s S a m a r a s , l e a de r of N e w D e m oc r a c y , t o c obbl e t oge t he r a
br oa d c oa l i t i on w i t h hi s a r c h – r i va l , P a s ok. Y e t S a m a r a s w a s poor l y
r e ga r de d by E ur ope a n l e a de r s . I n oppos i t i on hi s r e f us a l t o s upp or t t he f i r s t
ba i l – out w a s de e m e d t o ha ve c r i ppl e d P a pa ndr e ou. L a t e r , w he n he ba c ke d
t he uni t y gove r nm e nt of L uc a s P a pa de m os , S a m a r a s w a s e va s i ve a bout t he
t e r m s of t he s e c ond r e s c ue . A nd by f or c i ng e a r l y e l e c t i ons i n t he m i ds t of
a w r e nc hi ng a dj us t m e nt , he w a s bl a m e d f or ope ni ng t h e door t o
e xt r e m i s t s .
F or be t t e r or w or s e , S a m a r a s w a s now t he l a s t hope f or G r e e c e .
B a r r os o f l e w t o A t he ns t o w a r n hi m t o s t op t a l ki ng a bout r e ne got i a t i ng
G r e e c e ’ s ba i l – out c ondi t i ons . I n pr i va t e a nd i n publ i c , he t ol d hi m :
“ D e l i ve r , de l i ve r , de l i ve r .” T o t he out r a ge of m a ny i n B r us s e l s , M e r ke l ’ s
gove r nm e nt c on t i nue d t o e nt e r t a i n t he i de a of pus hi ng G r e e c e out , e ve n
t hough i t s c i t i z e ns ha d vot e d f or pr o- E ur ope a n pa r t i e s . P hi l i pp R ös l e r ,
l e a de r of G e r m a ny’ s l i be r a l F r e e D e m oc r a t s , M e r ke l ’ s j uni or c oa l i t i on
pa r t ne r , de c l a r e d on J ul y 22nd : “ A w i t hdr a w a l of G r e e c e ha s l ong s i nc e
l os t i t s t e r r or .” B y t he n S pa n i s h t e n- ye a r bond yi e l ds ha d pa s s e d t he
ps yc hol ogi c a l t hr e s hol d of 7% , a nd I t a l i a n one s w e r e not f a r be hi nd. T e r r or
ha d r e t ur ne d t o t he e ur o z one .
W h a t e v e r i t t a k e s
T o s om e , C a nne s a nd i t s a f t e r m a t h i n l a t e 2011 w a s t he c r ue l l e s t m om e nt
of t h e e n t i r e c r i s i s . T o m a ny ot he r s , t he m om e nt of gr e a t e s t de s pa i r c a m e
i n t he s um m e r of 2012. D r a ghi , s pe ndi ng a f e w da ys i n L ondon a t t he e nd
of J u l y , w a s w or r i e d a bout f i na nc i a l da t a : e c onom i c f unda m e n t a l s ha d not
c ha nge d a nd t he r e w a s a m pl e l i qui di t y . Y e t m one y w a s f l e e i ng nor t h,
r e gul a t or s w e r e t e l l i ng ba nks t o ke e p t he i r m one y w i t hi n na t i ona l bor de r s ,
c r os s – bor de r ba n k l e ndi ng ha d a l l but s t oppe d, a nd s ove r e i gn s pr e a ds w e r e

r i s i ng a l ong w i t h c r e di t – de f a ul t s w a ps . T o t he E C B t hi s w a s e vi de nc e of
t he e ur o z one m ovi ng t ow a r ds t he “ ba d e qui l i br i um ” e voke d by P a ul D e
G r a uw e , t he n a pr of e s s or of e c onom i c s a t t he C a t hol i c U ni ve r s i t y of
L e uve n. H e ha d a r gue d i n 2011 t ha t , unl e s s t he E C B a c t e d a s a l e nde r of
l a s t r e s o r t , c ount r i e s i n t he e u r o z one w e r e e f f e c t i ve l y bor r ow i ng i n a
f or e i gn c ur r e nc y a nd c oul d e a s i l y be pus he d i nt o de f a ul t by pa ni c ke d
m a r ke t s . D r a ghi t hought t ha t f e a r of t he e ur o’ s br e a k- up w a s be c om i ng a
s e l f – f ul f i l l i ng pr oc e s s . O nl y t he E C B c oul d put a n e nd t o t he
“ r e de nom i na t i on r i s k” .
O n J ul y 26t h, t h e e ve of t he s um m e r ’ s ot he r bi g s por t i ng f e s t i va l , t he
L ondon O l ym pi c s , D r a ghi a ddr e s s e d a gr oup of i nve s t or s ga t he r e d i n t he
s pl e ndour of L a nc a s t e r H ous e i n L ondon. T he s i ngl e c ur r e nc y , he
r e c a l l e d,6 ha d onc e be e n de s c r i be d a s a bum bl e be e w hi c h, a s s c i e nt i f i c l or e
ha d i t , s houl d not be a bl e t o f l y . T he e ur o a r e a w a s “ m uc h, m uc h s t r onge r
t ha n pe opl e a c know l e dge t oda y ” ; out s i de r s w e r e unde r e s t i m a t i ng r e c e nt
r e f or m s a nd t he pol i t i c a l w i l l t o m a ke t he e ur o i r r e ve r s i bl e . T he n c a m e a
s e e m i ngl y uns c r i pt e d s e nt e nc e t ha t m a de hi s a udi e nc e s i t up. “ W i t hi n our
m a nda t e , t he E C B i s r e a dy t o do w ha t e ve r i t t a ke s t o pr e s e r ve t he e ur o,”
s a i d D r a ghi , pa u s i ng f or a m om e nt . “ A nd be l i e ve m e , i t w i l l be e nough.”
D e a l i ng w i t h m a r ke t s ’ f e a r of “ c onve r t i bi l i t y r i s k” , de c l a r e d D r a ghi , w a s
w i t hi n t he r e m i t of t he E C B .
M a r ke t s ha d us ua l l y i gnor e d l e a de r s ’ pr om i s e s t o do w ha t e ve r i t t ook
t o s a ve t he c ur r e nc y . B ut D r a ghi ’ s w or ds ha d a n i m m e di a t e e f f e c t , e ve n
t hough n obody w a s qui t e s ur e w ha t w oul d f ol l ow – not e ve n a l l m e m be r s
of t he E C B ’ s e xe c ut i ve boa r d . T he r e c oul d not s i m pl y be a r e t ur n t o
T r i c he t ’ s S e c ur i t i e s M a r ke t P r ogr a m m e ( S M P ) , by now r e ga r de d a s a n
e xpe ns i ve m i s t a ke t ha t ha d l um be r e d t he E C B w i t h m or e t ha n €200
bi l l i on- w or t h of vul ne r a bl e bonds , t o l i t t l e e f f e c t . D r a ghi ne ve r f or got how
B e r l us c oni ha d r e ne ge d on hi s pr om i s e s of r e f or m t he pr e vi ou s ye a r . T he
E C B c on c l ude d t ha t t he S M P h a d s uf f e r e d f r om m ul t i pl e f l a w s . I t ha d no
m e a ns o f c om pe l l i ng c ount r i e s t o r e f or m . I t w a s l i m i t e d i n s c ope , s o ne ve r
a m ount e d t o t he “ bi g ba z ooka ” ne e de d t o w a r d of f s pe c ul a t or s . I t s
r e s our c e s w e r e s c a t t e r e d a c r os s a r a nge of m a t ur i t i e s . A nd i t l e f t t he E C B
e xpos e d pol i t i c a l l y .

S o n ow D r a ghi r e i nve nt e d t he f or m ul a . H i s ne w pol i c y of out r i ght
m one t a r y t r a ns a c t i ons ( O M T ) , out l i ne d on A ugus t 4t h a nd t he n s e t out i n
de t a i l on S e pt e m be r 6t h, w oul d r e qui r e c ount r i e s s e e ki ng E C B
i nt e r ve nt i on t o r e que s t he l p f r om t he r e s c ue f und a nd s i g n up t o a
m a c r oe c onom i c a dj us t m e nt pr ogr a m m e . T he f und w oul d ha ve t o i nt e r ve ne
i n t h e p r i m a r y b ond m a r ke t . O nl y t he n w oul d t he E C B de c i de w he t he r t o
i nt e r ve ne i n t he s e c onda r y m a r ke t , w he r e i t w oul d c onc e nt r a t e on buyi ng
s hor t – da t e d bond s w i t h a m a t ur i t y of l e s s t ha n t hr e e ye a r s . C r uc i a l l y , t he r e
w oul d b e no pr e – s e t l i m i t t o t he qua nt i t i e s i t c oul d buy . I n ot he r w or ds , i t
w oul d be l e f t t o gove r nm e nt s t o de c i de w he t he r a c ount r y w a s s ol ve nt , a nd
ove r t l y t o i m pos e r e f or m s , r a t he r t ha n l e a vi ng t he E C B t o s e nd out s e c r e t
l e t t e r s . A nd t he E C B w oul d c onc e nt r a t e i t s pot e nt i a l l y huge f i r e pow e r on a
na r r ow f r ont of t he bond m a r ke t .
E ve n s o, O M T w a s r e s i s t e d by t he B unde s ba nk’ s pr e s i de nt , J e ns
W e i dm a nn, w ho vot e d a ga i ns t t he pol i c y , s a yi ng i t w a s a ki n t o pr i nt i ng
m one y . B ut unl i ke hi s pr e de c e s s or , A xe l W e be r , he di d not r e s i gn.
T e l l i ngl y , hi s c ol l e a gue s f r om F i nl a nd a nd t he N e t he r l a nds – t he t r a di t i ona l
e m m e r de ur s – vot e d i n f a vo ur . A nd t he G e r m a n gove r nm e nt m a de c l e a r i t s
s uppor t f or D r a ghi . W e i dm a nn s ounde d i nc r e a s i ngl y l i ke a pr ophe t i n t he
w i l de r ne s s , de c l a r i ng t ha t s a vi ng t he e ur o w a s a j ob f or e l e c t e d l e a de r s , not
c e nt r a l b a nke r s . A t one poi nt he c ouc he d hi s c r i t i c i s m i n l i t e r a r y t e r m s , by
quot i ng G oe t he ’ s F aus t : i n t he pl a y t he H ol y R om a n E m pe r or c om pl a i ns
of b e i ng s hor t o f gol d; M e phi s t ophe l e s pe r s ua de s hi m t o s i gn a doc um e nt
w hi c h i s t he n r e pr oduc e d a nd di s t r i but e d a s pa pe r m one y; but a f t e r t he
i ni t i a l e c onom i c ups w i ng c om e s i ne vi t a bl e i nf l a t i on a nd c ol l a ps e .7 T he
l e s s on, s a i d W e i dm a nn, w a s t ha t c e nt r a l ba nks m us t a voi d t he t e m pt a t i on
of s ol vi ng s hor t – t e r m pr obl e m s by c r e a t i ng m one y l e s t t he y c r e a t e l ong-
t e r m da m a ge . T o w hi c h t he E C B ’ s i ns i de r s r e t or t e d: t he B unde s ba nk
a l w a ys ha s a s ol ut i on f or t he l ong t e r m , ne ve r f or t he s hor t t e r m .
T he i m pa c t of O M T e xc e e de d a l l e xpe c t a t i ons . F r om t he e nd of J ul y
onw a r ds , bond yi e l ds of t he m os t t r oubl e d s t a t e s c a m e dow n a l m os t
c ont i nuous l y . B y t he e nd of 2 012 I t a l i a n a nd S pa ni s h bond yi e l ds ha d
f a l l e n t o a bout 5% e a c h ( t he s pr e a d ove r G e r m a n bonds w a s s t i l l 200 ba s i s
poi nt s ) . M or e good ne w s c a m e i n S e pt e m be r , w he n G e r m a ny’ s
c ons t i t ut i ona l c our t ga ve t he go- a he a d f or t he r a t i f i c a t i on of t he E S M , t he

pe r m a ne nt r e s c ue f und, s ubj e c t t o m i nor c a ve a t s . T he f und c a m e i nt o
e xi s t e nc e i n e a r l y O c t obe r . B a s e d on pa i d- i n c a pi t a l r a t he r t ha n gua r a nt e e s ,
t he E S M w a s a m or e r obus t i ns t r um e nt t ha n t he E F S F i t w a s r e pl a c i ng ( t he
t w o w i l l ove r l a p f or s om e ye a r s ) .
D r a ghi w oul d l a t e r t e l l s e ni or e ur o- z one pol i c ym a ke r s t ha t t he
c om m i t m e nt t o s t a r t a ba nki ng uni on ha d c r e a t e d t he c ondi t i on s f or O M T .
A s a not he r E C B i ns i de r put i t :
W e w e r e w i l l i ng t o bui l d a br i dge , but i t c oul d not be a br i dge t o
now he r e . T he l e ade r s had t o bui l d a r oad on t he ot he r s i de .
A t t he t i m e of w r i t i ng, m a r ke t s ha d not c a l l e d D r a ghi ’ s bl uf f . O M T ,
a c c or di ng t o one E C B i ns i d e r , w a s “ by f a r t he m os t s i gni f i c a nt
i nt e r ve nt i on of m one t a r y hi s t or y .” I t ha d not c os t a c e nt , a nd di d not s t oke
i nf l a t i on. E ve n W e i dm a nn w oul d a dm i t , i n pr i va t e , t ha t i t ha d w or ke d
be t t e r t ha n he w oul d ha ve e xpe c t e d.
N o G r e x i t
E ve n w i t h t he E C B ’ s i nt e r ve nt i on, t he f ut ur e of t he e ur o z one c oul d not be
s e t t l e d u nt i l t he que s t i on of G r e e c e w a s r e s ol ve d. W ha t t o do? M e r ke l ha d
ne ve r be e n a m ong t hos e m os t m i l i t a nt l y pus hi ng f or t he e xpul s i on of
G r e e c e ; s he ha d e ve n de s c r i be d he r s e l f i n pr i va t e c onve r s a t i ons a s t he onl y
pe r s on i n G e r m a ny s t i l l w i l l i ng t o ke e p t he G r e e ks i n. A s s he t ol d t he
B unde s t a g i n F e br ua r y 2012, “ I s houl d a nd ha ve t o t a ke r i s ks , b ut I c a nnot
e m ba r k on a dve nt ur e s .” S he ha d a l l ow e d he r m i ni s t e r s t o us e t he t hr e a t of
e xpul s i on t o e xe r t pr e s s ur e on G r e e c e t o a bi de by i t s pr ogr a m m e a nd,
l a t t e r l y , t o c onvi nc e vot e r s t o s uppor t pr o- E ur ope a n pa r t i e s .
T hr oughout t he c r i s i s , M e r ke l ha d r e c e i ve d c ont r a di c t or y a dvi c e , bot h
a t hom e a nd a br oa d. S om e a t t he I M F t hought G r e e c e w oul d be be t t e r of f
r e t ur ni ng t o t he dr a c hm a gi ve n t he e ur o z one ’ s m uddl e d pol i c i e s . A t t he
s a m e t i m e , J os é M a nue l B a r r os o, pr e s i de nt of t he E ur ope a n C om m i s s i on,
w a r ne d M e r ke l t ha t G r e xi t m i g ht c a us e s o m uc h pol i t i c a l i ns t a bi l i t y a s t o
pr ovoke a not he r m i l i t a r y i nt e r ve nt i on. B ut dur i ng A ugus t 2012 M e r ke l
m a de a f i r m de c i s i on: G r e e c e w oul d s t a y i n t he e ur o, e ve n i f t ha t t ook
m or e m one y . S o m e t hi nk t he m om e nt of c l a r i t y c a m e dur i ng he r w a l ki ng

hol i da y i n t he I t a l i a n A l ps , or s oon a f t e r he r r e t ur n t o B e r l i n. O t h e r s
s ugge s t t he f i na l de c i s i on w a s t a ke n dur i ng a t r i p t o C hi na a t t he e nd of t he
m ont h, w he n s he w a s gr i l l e d by C hi ne s e l e a de r s a bout t he f ut ur e of t he
e ur o z one . W ha t m a de up he r m i nd w e r e he r c onve r s a t i ons w i t h W e i dm a nn
a nd t he E C B ’ s J ör g A s m us s e n. N e i t he r c oul d of f e r a ny a s s ur a nc e t ha t t he
c ons e que nc e s of G r e xi t c oul d be c ont a i ne d.
W he n t he ne w l y e l e c t e d S a m a r a s , r e c ove r i ng f r om e ye s ur ge r y , vi s i t e d
B e r l i n o n A ugus t 24t h, M e r ke l a l r e a dy s ounde d m uc h m or e s ym pa t he t i c t o
t he pl i ght of G r e e c e . S he t ol d hi m pr i va t e l y s he w a s r e a dy t o “ he l p” i f
G r e e c e w a nt e d t o l e a ve t he e ur o; but i f i t w a nt e d t o s t a y , s he ne e de d
a s s ur a nc e s t ha t S a m a r a s w oul d de l i ve r r e f or m a nd f i s c a l di s c i pl i ne . T he
G r e e k p r i m e m i ni s t e r s a i d G r e xi t w a s i nc onc e i va bl e , a nd he w oul d r e s i gn
i m m e di a t e l y i f i t w e r e e ve r on t he c a r ds .
T he s t r onge s t s i gna l t ha t G r e e c e w oul d s t a y c a m e on O c t o be r 9t h,
w he n M e r ke l m a de he r f i r s t t r i p t o G r e e c e , e xpr e s s e d he r de s i r e t ha t t he
c ount r y s houl d s t a y i n a nd of f e r e d “ pr a c t i c a l ” a s s i s t a nc e w i t h s t r uc t ur a l
r e f or m s , s uc h a s G e r m a n e xpe r t s t o he l p ove r ha ul t a x a dm i ni s t r a t i on a nd
m ode r ni s e l oc a l gove r nm e nt . H e r a t t e m pt t o e m pa t hi s e w i t h t he G r e e ks
w a s not uni ve r s a l l y w e l c om e d. P r ot e s t e r s out s i de pa r l i a m e nt w a ve d
ba nne r s de c l a r i ng “ A nge l a you a r e not w e l c om e ” . M uni c i pa l w or ke r s i n
f ul l N a z i uni f or m , one of t he m w i t h a H i t l e r m ous t a c he , dr ove a j e e p
f l yi ng s w a s t i ka f l a gs t hr ough t he s t r e e t s a s a r e m i nde r of t he G e r m a n
oc c upa t i on i n t he s e c ond w or l d w a r . R i ot pol i c e r e s or t e d t o t e a r ga s a nd
s t un gr e na de s t o ke e p pr ot e s t e r s f r om t he pa r l i a m e nt bui l di ng.
A l t hough G e r m a ny no l onge r w a nt e d t o t hr ow G r e e c e out , i t s t i l l di d
not w a nt t o l e nd i t m or e bi l l i on s t o ke e p i t i n. A t hi r d pr ogr a m m e w oul d
not go dow n w e l l i n t he B unde s t a g. S o G r e e c e ha d t o f i nd l a r ge s a vi ngs
( w or t h m or e t ha n 7% of G D P ) i n 2013 a nd 2014 t o m a ke up f or t he t i m e
l os t e a r l i e r i n t h e ye a r a nd t o de a l w i t h t he c ons e que nc e s of a d e e pe r – t ha n-
e xpe c t e d r e c e s s i on. I t w oul d be gi ve n t w o m or e ye a r s t o r e a c h i t s t a r ge t of
a pr i m a r y budg e t s ur pl us of 4.5% of G D P i n 2016 i ns t e a d of 2014. T ha t
w oul d r e qui r e m or e l oa ns i n f u t ur e , a nd m or e l oa ns w oul d r a i s e t he de bt .
F or now t he m os t c ont e nt i ous i s s ue w a s t he t ug- of – w a r be t w e e n t he I M F
a nd t he e ur o z one ove r t he s i z e of G r e e c e ’ s de bt . G r e e c e ’ s e c onom i c
out l ook w a s s o poor t ha t i t w ou l d pr oba bl y m i s s by a l ong s hot t h e t a r ge t
of br i ng i ng de bt dow n t o 120% of G D P by 2020. T he f i gur e w a s now

e xpe c t e d t o be 144% of G D P . T he I M F s ought out r i ght f or gi ve ne s s of de bt ,
now m o s t l y he l d by t he of f i c i a l l e nde r s ( he nc e t he t e r m of f i c i a l s e c t or
i nvol ve m e nt , or O S I ) . I t s a i d a w r i t e – of f w oul d be t he s t r onge s t pos s i bl e
s i gna l of t he e ur o z one ’ s i nt e nt t o ke e p G r e e c e i n, a nd s o w oul d boos t
i nve s t or c onf i de nc e . Y e t O S I w a s una c c e pt a bl e a he a d of G e r m a ny’ s
ge ne r a l e l e c t i on i n S e pt e m be r 2013; i t w oul d ha ve vi ndi c a t e d c r i t i c s w ho
s a i d m one y l e nt t o G r e e c e w oul d ne ve r be r e pa i d.
A f t e r m uc h w r a ngl i ng, a de a l i n N ove m be r a ga i n c ut G r e e c e ’ s i nt e r e s t
r a t e , de f e r r e d pa ym e nt f or t e n y e a r s a nd doubl e d m a t ur i t i e s t o 30 ye a r s . I t
i nc l ude d a c om m i t m e nt t o c ut G r e e c e ’ s de bt t o 124% of G D P i n 2020 a nd
t o “ s ubs t a nt i a l l y be l ow ” 110% o f G D P t w o ye a r s l a t e r , w i t h t he pr om i s e t o
t a ke m or e a c t i on i f ne c e s s a r y onc e G r e e c e r e a c he d a pr i m a r y budge t
s ur pl us . N e ve r t he l e s s , a n i m por t a nt l i ne ha d be e n c r os s e d. W i t hout s a yi ng
s o t oo l oudl y , t he e ur o z one w a s r e a dy t o pa y t o ke e p G r e e c e i n t he
c ur r e nc y . S pa i n a nd I t a l y w e r e a l r e a dy l e ndi ng t o G r e e c e a t a l ow e r r a t e
t ha n t he y c oul d bor r ow .
B a n k i n g d i s u n i o n
T he l a r g e s t c l oud ove r t he una c c us t om e d opt i m i s m i n t he a ut u m n of 2012
w a s G e r m a ny’ s ba c kt r a c ki ng on ba nki ng uni on. T he C om m i s s i on r us he d
out i t s l e gi s l a t i ve pr opos a l s f or a s i ngl e ba nk s upe r vi s or i n S e pt e m be r but
G e r m a ny m a de s ur e t ha t ke y pa r t s of t he doc um e nt , s uc h a s a t i m e t a bl e f or
t he c r e a t i on of a c om m on de pos i t – i ns ur a nc e s ys t e m , w e r e e xc i s e d. T he r e
w a s onl y a va gue c om m i t m e nt t o c r e a t i ng a ba nk- r e s ol ut i on a ut hor i t y f or
t he e ur o z one t o c om pl e m e nt t he s upe r vi s or . T he i m m e di a t e f oc us w oul d
be o n ha r m oni s i ng na t i ona l ba nki ng r ul e s a c r os s t he E U a s a w hol e ,
i nc l udi ng “ ba i l – i n” pr oc e dur e s t o i m pos e l os s e s on s h a r e hol de r s ,
bondhol de r s a nd l a r ge de pos i t or s i n or de r t o s pa r e t he t a xpa ye r .
E ve n t he s upe r vi s or w a s not e nt i r e l y t o G e r m a ny’ s l i ki ng. T he
C om m i s s i on w a nt e d t he E C B – ba s e d s upe r vi s or t o ove r s e e a l l 6,000- pl us
ba nks i n t he e ur o z one . G e r m a ny i ns i s t e d i t s houl d f oc us onl y on t he
bi gge r “ s ys t e m i c ” ba nks , l e a vi ng s upe r vi s i on of s m a l l e r ba nks , i nc l udi ng
i t s o w n of t e n- t r oubl e d Spar k as s e n a nd L ande s bank e n, i n na t i ona l ha nds –
e ve n t hough S pa i n’ s e xpe r i e nc e s how e d t ha t t r oubl e i n s m a l l l e nde r s c oul d
be c om e s ys t e m i c . G e r m a ny a l s o s l ow e d dow n t he t i m e t a bl e f or t he

s upe r vi s or t o s t a r t w or k ( or i gi n a l l y J a nua r y 1s t 2013) on t he gr ounds t ha t
s uc h a n i m por t a nt t a s k s houl d not be r us he d. T he r e a f t e r , di r e c t ba nk
r e c a pi t a l i s a t i on s houl d onl y t a k e pl a c e onc e t he s ys t e m ha d s how n i t s e l f t o
be “ e f f e c t i ve ” .
W or s e w a s t o c om e . O n S e p t e m be r 25t h W ol f ga ng S c hä ubl e , t he
G e r m a n f i na nc e m i ni s t e r , a nd hi s D ut c h a nd F i nni s h c ol l e a gue s s ought t o
l i m i t t h e c om m i t m e nt t o di r e c t r e c a pi t a l i s a t i on: i t s houl d a ppl y onl y t o
ne w pr o bl e m s , n ot “ l e ga c y a s s e t s ” , a nd s houl d onl y be a “ l a s t r e s or t ” , a f t e r
us i ng pr i va t e c a pi t a l a nd t he n n a t i ona l f unds . S pa i n ga ve up on t he i de a of
di r e c t r e c a pi t a l i s a t i on of i t s ba n ks . I n D e c e m be r i t bor r ow e d €4 1 bi l l i on of
t he €100 bi l l i on a l l oc a t e d by t he e ur o z one , w hi c h w oul d i nc r e a s e i t s de bt
r a t i o by a bout 4 % of G D P . I r e l a nd’ s hope t ha t i t s ba nk de bt w oul d be t a ke n
ove r r e t r oa c t i ve l y w a s s i m i l a r l y da s he d.
A t t he e nd of 2012 f i na nc e m i ni s t e r s r e a c he d a c om pr om i s e on t he
s c ope o f t he ne w s upe r vi s or : i t w oul d di r e c t l y ove r s e e t he bi gge s t
“ s ys t e m i c ” ba nks i n t he e ur o z one ( a bout 130) , w hi l e da y- t o- da y c ont r ol of
s m a l l e r l e nde r s w oul d be l e f t t o na t i ona l r e gul a t or s , s ubj e c t t o c e nt r a l
r ul e s a n d t he r i ght of t he e ur o- z one s upe r vi s or t o a s s um e ove r s i ght of a ny
ba nk i f de e m e d ne c e s s a r y . B e yo nd ba nki ng uni on, t he ot he r pi l l a r s of V a n
R om puy’ s “ ge nui ne ” e c onom i c a nd m one t a r y uni on w e r e a l s o c r um bl i ng.
I n O c t o be r he ha d dr oppe d t he i de a of a t i m e t a bl e f or E ur obonds . A t a
s um m i t i n D e c e m be r he t r i e d t o pus h t he c onc e pt of “ f i s c a l c a pa c i t y” , a
F r e nc h- s pons or e d i de a t o c r e a t e a c e nt r a l budge t t o a c t a s a c ount e r –
c yc l i c a l e c onom i c t ool t o s t a bi l i s e c ount r i e s unde r goi ng a dow nt ur n,
m a ybe by pr ovi di ng be ne f i t s f o r s hor t – t e r m une m pl oym e nt . B ut t hi s w a s
ki l l e d t oo.
W ha t r e m a i ne d of V a n R om puy ’ s r oa dm a p w a s onl y a t i m e t a bl e f or t he
ne xt s t e p on ba n ki ng uni on – t h e c r e a t i on of a ba nk- r e s ol ut i on m e c ha ni s m
– a l ong w i t h t h e w i s p of a G e r m a n i de a t o ha ve “ c ont r a c t s ” be t w e e n
gove r nm e nt s a n d t he C om m i s s i on t o pr om ot e s t r uc t ur a l r e f or m s . I n a nod
t o F r a nc e , t he s e c oul d i nc l ude s om e e xt r a m one y . T hi s w a s l e s s a m bi t i ous
t ha n e a r l y G e r m a n i de a s t o e s t a bl i s h s om e ki nd of s ys t e m of t r a ns f e r s t o
he l p t he m os t t r oubl e d c ount r i e s . I t w a s c e r t a i nl y not t he F r e nc h i de a of a n
a ut om a t i c s t a bi l i s e r . T he C om m i s s i on publ i s he d i t s ow n “ bl ue pr i nt ” f or
r e f or m i n N ove m be r t o t r y t o ke e p s om e of t he s e i de a s a l i ve , but E U
l e a de r s ha d l os t i nt e r e s t i n m a ki ng gr e a t f e de r a l i s t l e a ps , i f t he y e ve r

ha r bour e d t he not i on i n t he f i r s t pl a c e . A he a d of t he G e r m a n e l e c t i on due
i n S e pt e m be r 2013, M e r ke l w a s w a r y of t a ki ng on ne w l i a bi l i t i e s . S he ha d
a l r e a dy l os t he r “ c ha nc e l l or ’ s m a j or i t y” i n vot e s t o a ppr ove ba i l – out
pr ogr a m m e s , m e a ni ng t ha t s h e now ha d t o r e l y on vot e s f r om t he
oppos i t i on S oc i a l D e m oc r a t s .
I n s om e w a ys D r a ghi ’ s t hr e a t of unl i m i t e d i nt e r ve nt i on w or ke d t oo
w e l l . A s pr e s s ur e f r om m a r ke t s e a s e d, s o di d t he pr e s s ur e t o f i x t he e ur o
z one . T h e da nge r of m or a l ha z a r d di d not a ppl y j us t t o de bt or s ; i t a ppl i e d
t o c r e di t or c ount r i e s t oo. L e a de r s m a y ha ve pl e dge d t o do “ w ha t e ve r i t
t a ke s ” , but m or e of t e n i t w a s a m a t t e r of doi ng “ a s l i t t l e a s w e c a n ge t
a w a y w i t h” .
U g l i n e s s o n A p h r o d i t e ’ s i s l a n d
T he ne w doc t r i ne s of ba nki ng u ni on w oul d be t e s t e d s oone r t ha n e xpe c t e d,
i n t he c a s e of C ypr us . T he C om m i s s i on’ s pr opos e d r ul e s on “ ba i l – i n” w e r e
pe nc i l l e d i n t o a ppl y f r om 2018. G e r m a ny w a nt e d t he m i n 2015. B ut i n
C ypr us ba i l – i n w oul d be a ppl i e d i m m e di a t e l y , a nd i n t he m os t c ha ot i c
m a nne r pos s i bl e .
T he e a s t e r nm os t c ount r y i n t he E ur ope a n U ni on, c l os e r t o S yr i a t ha n t o
B e l gi um , F r a nc e or G e r m a ny , C ypr us ha s a l w a ys be e n a n a w kw a r d
m e m be r . I t e nt e r e d t he E U i n 20 04 a s a di vi de d i s l a nd, vot e r s i n t he G r e e k-
C ypr i ot r e publ i c ha vi ng r e j e c t e d a U N pl a n t o r e uni t e w i t h t he T ur ki s h-
C ypr i ot nor t h ( w he r e t he pl a n w a s s uppor t e d) on t he e ve of i t s a c c e s s i on t o
t he E U . T he G r e e k- C ypr i ot gove r nm e nt us e d a nd a bus e d E U i ns t i t ut i ons t o
w a ge i t s f e ud w i t h i t s nor t he r n r i va l a nd T ur ke y , a nd t o l e nd s uppor t t o
R us s i a . W i t h a n ove r s i z e d f i na nc i a l s e c t or ( m or e t ha n e i ght t i m e s G D P ) ,
c a t e r i ng m os t l y f or R us s i a n e xpa t r i a t e s , C ypr us w a s vul ne r a bl e w he n t he
f i na nc i a l c r i s i s s t r uc k i n 2008. I t w a s s hut out of m a r ke t s i n M a y 2011 a nd
t he n s uf f e r e d a doubl e bl ow : i t s ba nks t ook l a r ge l os s e s a s a r e s ul t of t he i r
e xpos ur e t o G r e e c e ( i nc l udi ng l os s e s e qui va l e nt t o 25% of G D P a s a r e s ul t
of t h e ha i r c ut o n G r e e k bonds ) ; a nd t he m a i n pow e r s t a t i on, ge ne r a t i ng
a bout ha l f of C ypr us ’ s e l e c t r i c i t y , w a s de s t r oye d by t he e xpl os i on of a
c a c he of w e a pons s t or e d c a r e l e s s l y ne a r by .
C ypr us ’ s pr e – c r i s i s boom w a s c l e a r l y uns us t a i na bl e . A l ong- r unni ng
c ur r e nt – a c c ount de f i c i t ga pe d e ve r w i de r . C om pa ni e s a nd hous e hol ds w e r e

huge l y i n de bt . A nd gove r nm e nt de bt , t hough c om pa r a t i ve l y l ow , w a s
r i s i ng be c a us e of ove r ge ne r ous c i vi l – s e r vi c e pa y a nd be ne f i t s ( i nc l udi ng
i nde x- l i nke d pa y r i s e s t w i c e a ye a r ) . W i t h a s hor t – t e r m l oa n f r om R us s i a
r unni ng out , a nd a r a t i ngs dow ngr a de t ha t m e a nt C ypr i ot de bt w a s no
l onge r e l i gi bl e a s c ol l a t e r a l a t t he E C B , C ypr us be l a t e dl y t ur ne d t o t he E U
f or he l p i n J une 2012, j us t a s i t t ook ove r t he r ot a t i ng E U pr e s i de nc y .
N e got i a t i ons pr ogr e s s e d s l ow l y . A he a d of t he pr e s i de nt i a l e l e c t i on i n
J a nua r y 2013, t he c om m uni s t i nc um be nt , D e m e t r i s C hr i s t of i a s , s a i d he
w oul d n ot s t a nd a ga i n. B ut he r e f us e d t o e nt e r t a i n t he f i s c a l c u t s t he t r oi ka
w oul d de m a nd; a nd he w a s f i r m l y oppos e d t o a ny pr i va t i s a t i on. T he e ur o
z one w a s i n no r us h: i t ha d e nou gh on i t s pl a t e w i t h G r e e c e a nd S pa i n, a nd
nobody w a s ke e n t o ba i l out ba nks s t uf f e d w i t h R us s i a n m one y , s om e of
w hi c h m i ght ha ve be e n t he f r u i t of c or r upt de a l i ngs . B e t t e r t o w a i t unt i l
a f t e r t he e l e c t i on, m a ny f e l t .
M e r ke l ha d be e n a m ong l e a de r s of t he c ons e r va t i ve E ur ope a n P e opl e ’ s
P a r t y w ho w e nt t o C ypr us t o s uppor t N i c os A na s t a s i a de s , l e a de r of t he
c e nt r e – r i ght D I S Y pa r t y , a m ont h be f or e he c om f or t a bl y w on t he
pr e s i de nt i a l e l e c t i on i n F e br ua r y 2013. B ut hi s pol i t i c a l “ f a m i l y” w a s l e s s
t ha n ge ne r ous w he n i t c a m e t o ne got i a t i ng a ba i l out . T he I M F , now l e s s
m a l l e a bl e a s a r e s ul t of t he f i a s c o i n G r e e c e , s a i d l e ndi ng C yp r us t he €17
bi l l i on ne e de d t o r e c a pi t a l i s e i t s ba nks a nd f i na nc e publ i c s pe n di ng w oul d
m a ke i t s de bt uns us t a i na bl e . G r e e k- s t yl e ha i r c ut s on gove r nm e nt bonds
w e r e un a ppe a l i ng, be c a us e m uc h of t he de bt w a s he l d by C ypr i ot ba nks .
M or e ove r , t he e ur o z one ha d vow e d t ha t t he G r e e k P S I w oul d be a n
e xc e pt i on. T he e xpe c t e d bount y of na t ur a l ga s of f C ypr us ’ s c oa s t w a s t oo
unc e r t a i n, a nd t he pr os pe c t of c om m e r c i a l e xpl oi t a t i on t oo t a ngl e d i n
r e gi ona l ge opol i t i c s . S o a l a r ge s ha r e of t he m one y w oul d ha ve t o c om e
f r om t he t w o bi g ba nks : B a nk o f C ypr us a nd C ypr us P opul a r B a nk, know n
a s L a i ki .
O n M a r c h 16t h A na s t a s i a de s s t a ye d i n B r us s e l s a t t he e nd of a n E U
s um m i t t o be on ha nd f or ba i l – out ne got i a t i ons . T he t a l ks t ur ne d ugl y w he n
he r e j e c t e d a ny l a r ge – s c a l e hi t on de pos i t or s , t he E C B t hr e a t e ne d t o c ut of f
l i qui di t y t o t he l a r ge C ypr i ot ba nks , a nd A na s t a s i a de s t hr e a t e ne d t o l e a ve
t he e ur o . A c om pr om i s e w a s f ound, but i t w a s a ba d one . A l l de po s i t or s
w oul d b e s ubj e c t t o a one – of f “ l e vy” : 9.9% on l a r ge de pos i t s a nd 6.75% on
t hos e be l ow t he €100,000 de pos i t – gua r a nt e e l i m i t . S om e how t he e ur o

z one , w o r ki ng l a t e a t ni ght a nd r un by a novi c e ( J e r oe n D i j s s e l bl oe m , t he
D ut c h f i na nc e m i ni s t e r , ha d r e c e nt l y be c om e c ha i r m a n of t he E ur ogr oup) ,
a gr e e d t o r a i d t he s a vi ngs of gr a ndm ot he r s r a t he r t ha n i m po s e a bi gge r
ha i r c ut o n R us s i a n ol i ga r c hs . T he m e s s c a m e dow n t o a f e t i s h a bout r ound
num be r s . G e r m a ny s a i d t he e ur o z one w oul d l e nd no m or e t ha n €10
bi l l i on; t he I M F i ns i s t e d t he i s l a nd’ s de bt s houl d be ke pt be l ow 100% of
G D P by 2020 ( a m or e e xa c t i ng s t a nda r d t ha n f or G r e e c e , on t he gr ounds
t ha t i t w a s a s m a l l e c onom y) ; a nd A na s t a s i a de s w a s a da m a nt t ha t a ny t a x
on bi g de pos i t or s s houl d be be l ow 10% .
A s ba nk s w e r e s hut i n C ypr us t o a voi d a n out r us h of m one y , t he r e
f ol l ow e d a w e e k of br i nkm a ns hi p, i nc l udi ng a 36–0 vot e i n t he C ypr i ot
pa r l i a m e nt t o r e j e c t t he t e r m s , s t r e e t pr ot e s t s , a f a i l e d a t t e m p t by C ypr us
t o t h r ow i t s e l f a t R us s i a ’ s f e e t a nd a publ i c ul t i m a t um by t he E C B . V a n
R om puy s t e ppe d i n t o t r y t o f i x t he m e s s . O n M a r c h 24t h A na s t a s i a de s
w a s f l ow n ba c k t o B r us s e l s on a B e l gi a n a i r f or c e pl a ne . H e r e s i s t e d t he
I M F ’ s a t t e m pt t o w i nd up bot h B a nk of C ypr us a nd L a i ki . T ha t w oul d
c r us h t he i s l a nd’ s e c onom y , he s a i d. I n t he e nd he a gr e e d t o s a c r i f i c e L a i ki
t o s a ve a r um p of B a nk of C ypr us . L a i ki ’ s ba d a s s e t s a nd a l l i t s uni ns ur e d
de pos i t s w e r e put i nt o a “ ba d b a nk” . I t s vi a bl e a s s e t s a nd i ns ur e d de pos i t s
w e r e pu t i nt o a “ good ba nk” a nd t r a ns f e r r e d t o B a nk of C y pr us ( a l ong
w i t h, que s t i ona b l y , L a i ki ’ s obl i ga t i on t o r e pa y t he E C B ’ s l i qui di t y l oa ns ) .
B a nk of C ypr us w oul d be r e s t r uc t ur e d by w i pi ng out s ha r e hol de r s . J uni or
a nd s e ni or bondhol de r s w e r e ba i l e d i n a nd gi ve n e qui t y . U ni ns ur e d
de pos i t or s w e r e s ubj e c t e d t o ha i r c ut s of 47.5% , a l s o i n e x c ha nge f or
e qui t y . T he r e m a i ni ng de pos i t s w e r e f or t he m os t pa r t put i nt o t e r m de pos i t
a c c ount s f or up t o t w o ye a r s .
T he ne w de a l w a s be t t e r t ha n t he ol d one , i n t ha t i t pr ot e c t e d i ns ur e d
de pos i t or s a nd c onc e nt r a t e d t he pa i n on t he t w o l a r ge s t ba nks , w hi c h ha d
be e n t he c a us e of t he pr obl e m . I t r e s t or e d a s e ns i bl e hi e r a r c hy of c r e di t or s
i n ba nk r e s ol ut i on, w he r e a s unde r t he pr e vi ous a gr e e m e nt , s e ni or
bondhol de r s w oul d ha ve be e n s pa r e d but s m a l l de pos i t or s hi t . B ut i t c a m e
a t a c os t . T he C ypr i ot e c onom y w a s pus he d i nt o a de e p s l um p, a l be i t
pe r ha ps not a s c a t a s t r ophi c a s s om e f e a r e d. T he e ur o z one f or t he f i r s t
t i m e i nt r oduc e d c a pi t a l c ont r ol s , m e a ni ng t ha t a e ur o i n C ypr us no l onge r
c a r r i e d t he s a m e va l ue a s a e ur o e l s e w he r e . T he r e put a t i on of t he e ur o
z one i n m a na gi n g t he c r i s i s w a s f ur t he r t a r ni s he d. A nd t he j udg m e nt of t he

E C B , now c ha r ge d w i t h s upe r vi s i ng t he bi gge s t ba nks , w a s a l s o
que s t i one d. I t ha d pr ovi de d l i qu i di t y t o L a i ki , e ve n t hough i t w a s bus t , a nd
t he n i ns i s t e d on be i ng r e pa i d f ul l y w he n t he ba nk w a s w ound up.
M or e ove r , i t ha d be e n pa r t y t o t he or i gi na l de a l t ha t unde r m i ne d t he E U –
w i de €100,000 gua r a nt e e t o de pos i t or s .
H a d C y pr us w a l ke d out of t h e e ur o, a s s om e e xpe c t e d, E ur ope a n
of f i c i a l s w e r e r e a dy w i t h a pr opos a l s f or a bl a nke t gua r a nt e e on a l l
de pos i t s i n t he e ur o z one a nd t he a c t i va t i on of O M T . S uc h i de a s w e r e
di s m i s s e d by t he G e r m a ns . T he pr opos i t i on w a s ne ve r t e s t e d, a s
A na s t a s i a de s c a ve d i n. T e l l i ngl y , s ove r e i gn- a nd c or por a t e – bond m a r ke t s
w e r e s a ngui ne t hr oughout t he w e e k- l ong s t a ndof f . D r a ghi ’ s f i r e w a l l he l d
f i r m . P l a i nl y , C ypr e xi t i n 2013 di d not hol d t he s a m e t e r r or a s G r e xi t ha d
i n 2011 or 2012.
G o o d n e w s , a t l a s t
L i t t l e s e e m e d t o s c a r e t he e ur o z one a ny m or e . T he pos s i bi l i t y of a ba i l out
f or S l ove ni a , w hi c h w a s gr a ppl i ng w i t h t he c ol l a ps e of i t s opa que ba nki ng
s ys t e m , pa r t of a w e b of pol i t i c a l pa t r ona ge , w a s t r e a t e d a s a t i dyi ng- up
e xe r c i s e . T hr ough 2013 bond yi e l ds i n pe r i phe r a l c ount r i e s de c l i ne d
gr a dua l l y but s t e a di l y , pe r t ur be d onl y on oc c a s i on. S pr e a ds ove r G e r m a n
bonds , w hi c h ha d e xc e e de d 600 ba s i s poi nt s f or S pa i n a nd 500 f or I t a l y i n
J ul y 201 2, f e l l s t e a di l y t o be l ow 200 ba s i s poi nt s f or bot h b y F e br ua r y
2014. T he i r bond yi e l ds f e l l t o pr e – c r i s i s l e ve l s ( s e e F i gur e 6.2 ) . E ve n
G r e e c e , w hos e s pr e a d pe a ke d a t 2,900 ba s i s poi nt s i n J une 2012, w a s dow n
t o a b out 650. A n d, ha l t i ngl y a t f i r s t , e c onom i c gr ow t h r e t ur ne d t o t he e ur o
z one . N o c ount r y ha d l e f t t he e u r o, a nd s e ve r a l s t i l l w a nt e d t o j oi n. L a t vi a ,
t he pos t e r – c hi l d f or ha r d, f r ont – l oa de d a us t e r i t y w i t h a f i xe d c ur r e nc y ( i t s
c ur r e nc y w a s pe gge d t o t he e u r o) j oi ne d on J a nua r y 1s t 2014, f ol l ow i ng
E s t oni a , w hi c h e nt e r e d i n 2011. L i t hua ni a w a nt s t o be ne xt .

FIG 6.2 S a f e l a n d i n g
Ten-year government-bond yields, July 2011-December 2013, %
S o u r c e : Thompson Reuters
C ur r e nt – a c c ount de f i c i t s i n t he pe r i phe r y na r r ow e d, not j us t be c a us e
i m por t s c ol l a ps e d but a l s o be c a us e e xpor t s w e r e r i s i ng. W i t h t h e e a s i ng of
t he f i na nc i a l c r i s i s , t he pa c e o f a us t e r i t y w a s s e ns i bl y r e l a xe d. I n M a y
2013 F r a nc e , S p a i n a nd S l ove ni a w e r e gi ve n a n e xt r a t w o ye a r s t o m e e t
t he i r de f i c i t t a r ge t of 3% of G D P . T he N e t he r l a nds a nd P or t uga l got a n
e xt r a ye a r . I t a l y c a m e out of i t s e xc e s s i ve de f i c i t pr oc e dur e i n J une . T ha t
s a i d, t oughe r f i s c a l r ul e s know n a s t he “ t w o- pa c k” c a m e i nt o f or c e i n t he
a ut um n of 2013, obl i gi ng c ount r i e s t o s ubm i t t he i r dr a f t budge t s f or 2014
t o t he C om m i s s i on f or c om m e nt be f or e be i ng s e nt t o na t i ona l pa r l i a m e nt s .
I nc r e a s i ngl y , t he C om m i s s i on f oc us e d i t s ye a r l y pol i c y r e c om m e nda t i ons
on p r om ot i ng s t r uc t ur a l r e f or m s , t hough e ve n t ha t w a s r e s e nt e d by F r a nc e ,
w i t h H ol l a nde t e l l i ng B r us s e l s not t o “ di c t a t e ” s pe c i f i c r e f or m s . T o t he
i r r i t a t i on of M e r ke l ’ s gove r nm e nt , t he C om m i s s i on pl uc ke d up t he c our a ge
i n N ove m be r t o l a unc h a n i n- de pt h s t udy of G e r m a ny’ s l a r ge a nd
pe r s i s t e nt c ur r e nt – a c c ount s ur pl us .
B ot h I r e l a nd a nd S pa i n opt e d f or a “ c l e a n” e nd t o t he i r ba i l out
pr ogr a m m e s a t t he e nd of 2013. T he m ove m a y ye t pr ove t o be hubr i s t i c .
I M F pr o gr a m m e s us ua l l y e nd w i t h a l i ne of c r e di t t o f a c i l i t a t e a f ul l r e t ur n
t o m a r ke t f i na nc i ng. I r e l a nd a n d S pa i n m a y not ha ve ha d m uc h c hoi c e i n
t he m a t t e r . M e r ke l w a s not ke e n t o a s k t he B unde s t a g f or m or e m one y . I t

s ui t e d h e r t o ha ve t he s t r onge s t pos s i bl e de m ons t r a t i on of t he s uc c e s s of
t he pol i c i e s s he ha d e na c t e d ( a nd of t e n c ha nge d) . A nd i t s ui t e d he r I r i s h
a nd S pa ni s h c ou nt e r pa r t s t o boa s t t ha t t he y w e r e f r e e of t he dr e a de d t r oi ka .
B ut t he i r e m a nc i pa t i on m a y r e s ul t i n pr ol onge d s e r vi t ude f or P or t uga l .
D e s pi t e i t s c om pl i a nc e w i t h ba i l – out c ondi t i ons , P or t uga l s uf f e r e d a
w obbl e i n t he s pr i ng of 2013 w he n i t s c ons t i t ut i ona l c our t bl oc ke d s om e
de f i c i t – c ut t i ng m e a s ur e s . I t s de f i c i t i s l ow e r t ha n S pa i n’ s but i t s de bt i s
l a r ge r a nd i t s gr ow t h w e a ke r . I f a s t i gm a i s a t t a c he d t o a pr e c a u t i ona r y l i ne
of c r e di t , P or t uga l m i ght ye t be pus he d i nt o a s e c ond ba i l – out .
T h e w o o d e n u n i o n
A f t e r a l ong pa us e c a us e d by t he G e r m a n e l e c t i on i n S e pt e m be r 2013,
w hi c h s a w M e r ke l r e t ur ne d t o p ow e r a t t he he a d of a gr a nd c o a l i t i on w i t h
t he S oc i a l D e m oc r a t s , t he e ur o z one r e s um e d w or k on ba nki ng uni on i n t he
a ut um n of 2013. A t i t s he a r t , ba nki ng uni on r e qui r e s t r us t . G e r m a ny m us t
f e e l a bl e t o s ha r e l i a bi l i t i e s f or e ve r ybody’ s ba nks . A nd a l l c ou nt r i e s m us t
a gr e e t o s t op c o ddl i ng t he i r ba nks s o t ha t m or e pa n- E ur ope a n l e nde r s c a n
e m e r ge .
L e ga l w or k on t he s i ngl e s upe r vi s or w a s f i na l i s e d i n N ove m be r . I t w a s
due t o be f ul l y ope r a t i ona l a ye a r l a t e r , w i t h D a ni è l e N ouy , s e c r e t a r y-
ge ne r a l of F r a nc e ’ s ba nk a nd i ns ur a nc e s upe r vi s or , a s i t s f i r s t bos s . T he
ne xt s t a ge , pot e nt i a l l y i nvol vi ng publ i c m one y , w a s m or e di f f i c ul t : t he
c r e a t i on of a s i n gl e r e s ol ut i on m e c ha ni s m t o w i nd up or r e s t r uc t ur e bus t
ba nks . G e r m a ny ha d s t ubbor nl y oppos e d a c e nt r a l a ut hor i t y w i t h a c c e s s t o
pool e d f unds ( l e vi e d f r om t he ba nks ) , pus hi ng i ns t e a d f or a ne t w or k t ha t
w oul d l e a ve G e r m a n m one y i n G e r m a n ha nds . W ol f ga ng S c hä ubl e ,
r e a ppoi nt e d a s G e r m a n f i na nc e m i ni s t e r a f t e r t he e l e c t i on, ha d s a i d i n M a y
t ha t t he e ur o z one s houl d s t a r t w i t h a “ t i m be r – f r a m e d” ba nki ng uni on; a
s t e e l one w oul d r e qui r e c ha ngi n g t he t r e a t i e s .8 B ut w i t h t he a ppr oa c h of a n
e nd- of – ye a r de a dl i ne , G e r m a ny be ga n t o s hi f t .
F i r s t , c o m m on ba i l – i n r ul e s t ha t w oul d a ppl y t o a l l E U c ount r i e s –
w he t he r i n or out of t he e ur o z one – w e r e a ppr ove d i n D e c e m be r . T he s e
w oul d e ns ur e t h e r e c oul d not be a not he r C ypr us – s t yl e f i a s c o. S ha r e hol de r s
a nd bondhol de r s w oul d ha ve t o t a ke t he f i r s t l os s e s – up t o 8% of t he
ba nk’ s t ot a l a s s e t s – be f or e a ny r e s ol ut i on f unds c oul d c om m i t t e d.

T he r e a f t e r t he r e w oul d be a c l e a r hi e r a r c hy of c r e di t or s , s o t ha t s e ni or
bondhol de r s w o ul d t a ke t he h i t be f or e de pos i t or s , a nd de pos i t s be l ow
€100,000 w oul d be pr ot e c t e d a t a l l t i m e s .
T he n S c hä ubl e m a de a n i m por t a nt c onc e s s i on. T he j oi nt e ur o- z one
r e s ol ut i on f und w oul d s t a r t w i t h na t i ona l “ c om pa r t m e nt s ” , but ove r a t e n-
ye a r pe r i od t he s e w oul d be pr o gr e s s i ve l y pool e d unt i l t he r e w a s a s i ngl e
E ur ope a n f und of a bout €55 bi l l i on ( $60 bi l l i on) . I n ot he r w or ds , he a gr e e d
t o m ut ua l i s e t he m one y of G e r m a n ba nks , i f not ye t t ha t of G e r m a n
t a xpa ye r s . A nd G e r m a ny’ s a ns w e r t o t he que s t i on of t r us t w a s t o gi ve t he
ne w s up e r vi s or t i m e t o r oot out t he pr obl e m s . T he pr i nc i pl e c o ul d one da y
be a ppl i e d t o ot he r r e f or m s : how a bout t he pha s e d i nt r o duc t i on of
E ur obonds ? F or now , S c hä ubl e ’ s l e ga l ni t pi c ki ng pr oduc e d a c om pl e x l e ga l
s t r uc t ur e ( m i xi ng E U t r e a t y pr ovi s i ons f or t he s i ngl e m a r ke t w i t h a n i nt e r –
gove r nm e nt a l t r e a t y) . T he de c i s i on- m a ki ng pr oc e s s t o w i nd up a ba nk
w oul d be a l m os t c om i c a l l y c o nvol ut e d, r a i s i ng w or r i e s a bout w he t he r a
f a i l i ng ba nk c oul d r e a l l y be de a l t w i t h ove r a w e e ke nd.
A f t e r s om e br i nkm a ns hi p, t he E ur ope a n P a r l i a m e nt a nd C ounc i l
a gr e e d a c om pr om i s e on M a r c h 20t h 2014, c onc l udi ng ba nki ng uni on i n
j us t t w o ye a r s . M E P s obj e c t e d t o i nt e r – gove r nm e nt a l i s m but r e l e nt e d
be c a us e t he a l t e r na t i ve w a s t o ha ve no r e s ol ut i on m e c ha ni s m a t a l l . I n
r e t ur n t he y obt a i ne d s om e s t r e a m l i ni ng of de c i s i on- m a ki ng. W i t h ba c ki ng
f r om t he E C B , t he y s hor t e ne d t h e pe r i od f or t he pool i ng of f unds ( f r om t e n
t o e i ght ye a r s ) a nd pe r m i t t e d t he f und t o bor r ow m one y on t he m a r ke t s .
A l l kne w t ha t i f t he i s s ue w e r e not s e t t l e d be f or e t he M a y 201 4 E ur ope a n
e l e c t i ons , i t r i s ke d be i ng de l a ye d i nde f i ni t e l y .
D e s pi t e he a dy t a l k of “ a r e vol ut i on” , ba nki ng uni on r e m a i ne d
i nc om pl e t e . T he r e w a s s t i l l no s i ngl e de pos i t – gua r a nt e e s c he m e . T he
pr om i s e of di r e c t r e c a pi t a l i s a t i on w a s r e m ot e : f i r s t l os s e s ha d t o be bor ne
by s ha r e hol de r s a nd c r e di t or s ; t he bur de n w oul d t he n be t a ke n up by
gove r nm e nt s a n d onl y i n e xt r e m i s by t he e ur o- z one r e s c ue f und. T he m os t
gl a r i ng f l a w w a s t he l a c k of a c om m on ba c ks t op, l e f t t o be d e c i de d a t a
f ut ur e da t e . I n t he t r a ns i t i on, na t i ona l t r e a s ur i e s w oul d s t e p i n i f t he
r e s ol ut i on f und r a n out of m on e y; onl y i f t he bur de n t hr e a t e ne d t o r ui n a
c ount r y c oul d i t t ur n t o t he E S M . T he obvi ous s ol ut i on, t o a l l ow t he E S M
t o e xt e n d a l i ne of c r e di t t o t he r e s ol ut i on f und, a s t he U S T r e a s ur y doe s t o
t he F D I C , w a s r e j e c t e d by G e r m a ny . S a vi ng t a xpa ye r s ’ m one y i s a

l a uda bl e a i m . B ut ba nki ng uni on c a nnot be c r e di bl e w i t hout s om e
a s s ur a nc e t ha t t a xpa ye r s c ol l e c t i ve l y s t a nd be hi nd i t i f a bi g c r i s i s s t r i ke s .
B a nki ng uni on di d not l i ve up t o t he pr om i s e t o he l p S pa i n or I r e l a nd
i n t h e c ur r e nt c r i s i s . N or w i l l i t be m uc h us e s houl d t he ne w s upe r vi s or
f i nd l a r ge hol e s i n t he ba nks w he n i t publ i s he s t he r e s ul t s of a t hor ough
e xa m i na t i on of ba nk ba l a nc e s h e e t s a t t he e nd of 2014. A t be s t , a nd onl y i f
done pr o pe r l y , b a nki ng uni on c oul d he l p pr e ve nt a nd l ow e r t h e c os t of a
f ut ur e c r i s i s . F or t he f or e s e e a b l e f ut ur e ba nki ng uni on, l i ke t he c ur r e nc y
uni on i t s e l f , w i l l r e m a i n a t i m be r – f r a m e d c ons t r uc t i on.
B e w a r e o f E u r o p h o r i a
A f t e r t h e l ong c r i s i s , m a r ke t s s e e m e d i n t he gr i p of “ E ur ophor i a ” by e a r l y
2014, p a r t i c ul a r l y a s t he i r w or r i e s s hi f t e d t o e m e r gi ng e c onom i e s . T he
e l a t i on w a s pr oba bl y ove r done . T he e ur o z one w a s ha r dl y i n good he a l t h.
T he e ur o z one s t oppe d s hr i nki ng i n t he f i r s t ha l f of 2013 but w a s
f or e c a s t t o gr ow onl y s l ow l y i n 2014, w he n j us t C ypr us a nd S l o ve ni a w e r e
s t i l l e xpe c t e d t o be i n r e c e s s i on. A w e a k r e c ove r y l e f t t he e ur o z one
vul ne r a bl e t o a not he r s l um p. U ne m pl oym e nt i n t he pe r i phe r y r e m a i ne d a t
w or r yi ngl y hi gh l e ve l s . F i na nc i a l m a r ke t s ha d be e n f r a gm e nt e d by t he
c r i s i s , w i t h f i r m s i n t he pe r i phe r y of t he e ur o z one pa yi ng hi g he r r a t e s of
i nt e r e s t f or t he i r l oa ns – t ha t i s , w he n c r e di t c oul d be obt a i ne d a t a l l – t ha n
e qui va l e nt c om pa ni e s i n “ c or e ” e c onom i e s . C om pa r a bl e bus i ne s s on e i t he r
s i de of , s a y , t h e bor de r be t w e e n I t a l y a nd A us t r i a c oul d pa y m a r ke dl y
di f f e r e nt i nt e r e s t r a t e s on ba nk l oa ns , a s F i gur e 6.3 s how s .

FIG 6.3 T h e n o r t h – s o u t h g a p
Interest on loans to non-financial corporations up to €1m, 2007–14,
%
S o u r c e : ECB
B e yond t hi s , t he da nge r of J a pa n- s t yl e de f l a t i on be ga n t o w or r y
pol i c ym a ke r s by e a r l y 2014, a s t he i nf l a t i on r a t e f or t he e ur o z one a s a
w hol e s l ow e d t o 0.7% i n F e br ua r y , w e l l be l ow t he E C B ’ s a l r e a dy
c ons e r va t i ve t a r ge t of hol di ng i nf l a t i on i n t he m e di um t e r m a t c l os e t o but
be l ow 2% . F a l l i ng pr i c e s – a l r e a dy a r e a l i t y i n G r e e c e , C ypr us , P or t uga l
a nd S l ova ki a – ha m pe r r e c ove r y , pr om pt c ons um e r s t o pos t pone pur c ha s e s
i n e x pe c t a t i on of l ow e r pr i c e s a nd i nc r e a s e t he bur de n of de bt on na t i ona l
e c onom i e s . A s C hr i s t i ne L a ga r de , t he I M F bos s , put i t i n J a nua r y 2014: “ I f
i nf l a t i on i s t he ge ni e , t he n de f l a t i on i s t he ogr e t ha t m us t be f ought
de c i s i ve l y .”
T w o i s s u e s , i n pa r t i c ul a r , hi ghl i ght e d t he f r a gi l i t y of t he e ur o z one ’ s
c ondi t i on. F i r s t w a s t he ol de s t a nd m os t i nt r a c t a bl e pr obl e m : G r e e c e .
A s t oni s hi ngl y , poor bl i ght e d G r e e c e m a de i t t o a pr i m a r y budge t s ur pl us
( be f or e i nt e r e s t ) a t t he e nd of 2013, f or onc e e xc e e di ng e xpe c t a t i ons ,
t ha nks i n pa r t t o a bum pe r t our i s t s e a s on. T hi s w a s de s pi t e l os i ng a qua r t e r
of i t s e c onom i c out put s i nc e t he s t a r t of t he c r i s i s , a nd w i t h 27% of i t s
w or kf or c e une m pl oye d. I n G e r m a ny , S a m a r a s w a s be i ng ha i l e d a s one of
t he s a vi our s of t he e ur o. T hi s s h oul d ha ve br ought c l os e r t he pr om i s e d da y

w he n t he e ur o z one w oul d e a s e i t s bur de n of de bt , f or e c a s t t o r e a c h 176%
of G D P a t t he e nd of 2013.
B ut a t t he be gi nni ng of 2014, j us t a s G r e e c e t ook ove r t he r ot a t i ng
pr e s i de nc y of t he E U , t hi ngs s t a r t e d t o s our a ga i n. G e r m a ny s a i d i t w oul d
not t a l k of de a l i ng w i t h G r e e c e ’ s de bt unt i l t he s e c ond ha l f of t h e ye a r , t ha t
i s , unt i l a f t e r t he E ur ope a n e l e c t i on. T he de l a y m i ght he l p t he G e r m a n
gove r nm e nt s t e m t he r i s e of t he ne w a nt i – e ur o A l t e r na t i ve f o r G e r m a ny
pa r t y , but w oul d m a ke i t ha r de r f or S a m a r a s t o r e s i s t t he m or e da nge r ous
c ha r ge of t he r a di c a l l e f t i s t pa r t y , S yr i z a , w hi c h w a s l e a di ng i n opi ni on
pol l s . M or e ove r , t he ne got i a t i ons w i t h t he t r oi ka , i n pa r t i c ul a r t he I M F , got
ba dl y s t uc k.
O n t he f a c e of i t , t he a r gum e nt w i t h t he t r oi ka w a s a bout w he t he r
G r e e c e s houl d c ont i nue t he l ong ye a r s of f i s c a l c ons ol i da t i on. G r e e c e ha d
a s h or t – t e r m pr obl e m , w i t h a s m a l l ga p i n i t s f i na nc i ng r e qui r e m e nt s i n t he
s e c ond ha l f of 2014, a nd a l o nge r – t e r m pr obl e m ove r how t o r e a c h a
pr i m a r y budge t s ur pl us of 4.5% of G D P by 2016, a s f or e s e e n i n i t s t r oi ka
pr ogr a m m e .
S a m a r a s , ha vi ng s ur vi ve d t hus f a r w i t h a n e ve r – s hr i nki ng
pa r l i a m e nt a r y m a j or i t y , a nnounc e d he c oul d no l onge r t a ke a ny a c r os s – t he –
boa r d a us t e r i t y m e a s ur e s . H e nc e f or t h, hi s gove r nm e nt s a i d, t he buddi ng
r e c ove r y s houl d not be s t i f l e d; G r e e c e w oul d s i m pl y gr ow i t s w a y t o t he
pr om i s e d s ur pl us . F or ve t e r a ns of t he I M F , s t i l l de f e ns i ve a bout ha vi ng
ba dl y m i s j udge d t he f i r s t G r e e k ba i l – out , opt i m i s t i c gr ow t h f or e c a s t s di d
not a m ount t o a c r e di bl e pol i c y .
B e ne a t h t he que s t i on of how m uc h m or e be l t – t i ght e ni ng G r e e c e w oul d
r e qui r e l a y de e pe r pr obl e m s . O ne w a s w he t he r G r e e c e ’ s de bt r e l i e f , i f a nd
w he n i t w a s a gr e e d, s houl d be i n t he f or m of a w r i t e – of f i n t he nom i na l
va l ue of t he de b t , or w he t he r s o f t e ni ng t he t e r m s of i t s a l r e a dy s of t l oa ns
by e xt e n di ng m a t ur i t i e s a nd r e duc i ng i nt e r e s t w oul d be good e nough. T he
I M F t hought a w r i t e – of f w oul d boos t c onf i de nc e a m ong i nve s t or s ; t he
c r e di t or c ount r i e s s a i d t ha t w a s pol i t i c a l l y una c c e pt a bl e . S o “ e xt e nd a nd
pr e t e nd” s e e m e d l i ke l y t o w i n.
A m or e w or r yi ng i s s ue w a s t h a t G r e e c e , e ve n t hough i t ha d l a r ge l y
c om pl i e d w i t h t he de m a nds of f i s c a l c ons ol i da t i on, w a s f a r b e hi nd i n i t s
pr om i s e s t o e na c t s t r uc t ur a l r e f or m s a nd pr i va t i s e s t a t e a s s e t s . S om e of
t he s e ha d a n i m pa c t on f i s c a l m a t t e r s . B ut t he m or e i m por t a nt one s ha d t o

do w i t h l i be r a l i s i ng t he c ount r y’ s s c l e r ot i c e c onom y t o r e l e a s e i t s gr ow t h
pot e nt i a l .
G r e e c e ha s s ha r pl y c ut i t s uni t – l a bour c os t s , but m os t l y by r e duc i ng
w a ge s r a t he r t ha n by r a i s i ng pr oduc t i vi t y . A nd de s pi t e t he f a l l i n l a bour
c os t s , G r e e k e xpor t s w e r e f a l l i ng onc e t he m ur ky t r a de i n f ue l a nd vol a t i l e
t our i s m r e ve nue s w e r e s t r i ppe d out of t he da t a . T hi s w a s a l a r m i ng. I n
S pa i n, P or t uga l a nd I r e l a nd l ow e r l a bour c os t s boos t e d e xpor t s . S om e
G r e e ks bl a m e d a l a c k of c r e di t . O t he r s not e d t ha t t he c ount r y’ s m a i n
e xpor t m a r ke t , t he E U , ha d be e n i n r e c e s s i on. B ut t he r e a l pr ob l e m w a s a n
e c onom y t ha t pr oduc e d f e w t r a da bl e goods . G r e e c e ha d s hot up t he W or l d
B a nk’ s r a nks f or t he e a s e of s t a r t i ng f i r m s ; but i n t he w i de r m e a s ur e of
e a s e of doi ng b us i ne s s , i t r a nke d 72nd i n t he w or l d, be hi nd A z e r ba i j a n,
K yr gyz s t a n, B e l a r us a nd K a z a khs t a n. A l l t hi s w a s e vi de nc e of a c ount r y
s t i l l i n ne e d of f a r – r e a c hi ng s t r uc t ur a l r e f or m i f i t w a s t o s ur vi ve w i t h a
ha r d c ur r e nc y , a t a t i m e w he n i t s pol i t i c a l s ys t e m w a s r unni ng out of w i l l
f or f ur t he r c ha nge . E ur ope a n c ount r i e s w e r e pus hi ng t he I M F t o gi ve
G r e e c e a br e a k, a t l e a s t a he a d of t he E ur ope a n e l e c t i ons . B ut t hi s w a s a
pa r t i c ul a r l y odd r e que s t , gi ve n t he unw i l l i ngne s s of c r e di t or c ount r i e s t o
he l p S a m a r a s by gi vi ng hi m e a r l y de bt r e l i e f .
T he ot h e r c l oud ove r t he e u r o z one w a s t he f ut ur e of D r a ghi ’ s
“ w ha t e ve r i t t a ke s ” pr om i s e t o i nt e r ve ne i n bond m a r ke t s t hr ough hi s
pol i c y of O M T . T he l ong- de l a ye d j udgm e nt by G e r m a ny’ s c ons t i t ut i ona l
c our t w a s i s s ue d on F e br ua r y 14t h, a nd i t t ur ne d out t o be a s c a t hi ng
de nunc i a t i on of O M T . T he c our t s a i d i t s a w “ i m por t a nt r e a s ons t o a s s um e
t ha t i t e xc e e ds t he E ur ope a n C e nt r a l B a nk’ s m one t a r y pol i c y m a nda t e a nd
t hus i nf r i nge s t he pow e r s of t he m e m be r s t a t e s , a nd t ha t i t vi ol a t e s t he
pr ohi bi t i on of m one t a r y f i na nc i ng of t he budge t ” . T he c our t r e f r a i ne d f r om
t e l l i ng G e r m a n i ns t i t ut i ons t o s t op i m pl e m e nt i ng t he pol i c y , but r e s e r ve d
t he r i ght t o do s o a f t e r r e f e r r i ng t he c a s e t o t he E ur ope a n C our t of J us t i c e
( E C J ) . T hi s bought O M T a t l e a s t a not he r ye a r , a nd t he E C J m a y w e l l
s uppor t t he E C B ’ s c ont e nt i on t ha t t he pol i c y f a l l s w i t hi n i t s r e m i t .
N e ve r t he l e s s , t he K a r l s r uhe c our t ha s i nt r oduc e d a not e of doubt t ha t m a y
pr ove da nge r ous s houl d t he de bt c r i s i s e ve r r e i gni t e .

7 T h e c h a n g i n g b a l a n c e o f p o w e r
AS WELL AS CONSTITUTING THE MOST SERIOUS CHALLENGE t o t he E ur ope a n
pr oj e c t s i nc e i t s i nc e pt i on, t he e ur o c r i s i s ha s ha d a huge i m pa c t on i t s
pol i t i c a l a nd e c onom i c ba l a nc e , a t e ve r y l e ve l . A m ong c ount r i e s , i t ha s
huge l y i nc r e a s e d t he i nf l ue nc e of s om e , not a bl y G e r m a ny , a nd de c r e a s e d
t ha t of ot he r s , n ot a bl y F r a nc e . I t ha s f os t e r e d a gr ow i ng nor t h–s out h di vi de
i n t h e E ur ope a n U ni on, w hi c h ha s t o a n e xt e nt r e pl a c e d t he pr e vi ous e a s t –
w e s t one . I t ha s s ha r pe ne d t he di vi s i on be t w e e n t hos e c ount r i e s t ha t a r e i n
t he e ur o a nd t hos e t ha t a r e not . A m ong t he E U i ns t i t ut i ons , i t ha s
s t r e ngt he ne d t h e r ol e of t he E ur ope a n C ounc i l a t t he e xpe ns e of t he
E ur ope a n C om m i s s i on a nd t he E ur ope a n P a r l i a m e nt . A nd a l t hough i t ha s
l e d t o de e pe r i nt e gr a t i on of s or t s , e s pe c i a l l y i n f i s c a l pol i c y , i t ha s a l s o
r e duc e d t he pol i t i c a l w e i ght of t he c e nt r a l E U bodi e s a nd i nc r e a s e d t ha t of
na t i ona l gove r nm e nt s . M a ny i f not a l l of t he s e s hi f t s i n pow e r w i l l e ndur e .
M os t w i l l pr of oundl y a f f e c t t he w or ki ngs of t he w i de r E U a s w e l l a s t he
e ur o z one .
S t a r t w i t h t he i ns t i t ut i ons . T h r oughout t he hi s t or y of t he E ur ope a n
pr oj e c t , t he ba l a nc e of pow e r a m ong t he m a nd be t w e e n t he m a nd na t i ona l
gove r nm e nt s ha s a l t e r e d, s om e t i m e s f or s t r uc t ur a l r e a s ons , s om e t i m e s a s a
r e f l e c t i on of i ndi vi dua l pe r s ona l i t i e s . I n i t s e a r l y ye a r s t he C om m i s s i on
w a s e s pe c i a l l y i m por t a nt : m a n y ne w r ul e s a nd di r e c t i ve s w e r e ne e de d,
t he r e w a s no di r e c t l y e l e c t e d pa r l i a m e nt a nd E ur ope a n l e a de r s di d not ye t
m e e t i n t he E ur ope a n C ounc i l . Y e t t he F r e nc h pr e s i de nt , C ha r l e s de G a ul l e ,
w ho m i s t r us t e d t he C om m i s s i on a nd m uc h pr e f e r r e d i nt e r –
gove r nm e nt a l i s m , w a s huge l y i m por t a nt . I t w a s de G a ul l e w ho i n 1965

pr e c i pi t a t e d t he “ e m pt y c ha i r ” c r i s i s w he n F r a nc e r e f us e d t o a c c e pt a
t r e a t y- pr e s c r i be d m ove t ow a r ds m a j or i t y vot i ng i n t he C ounc i l of
M i ni s t e r s . A f t e r a l ong F r e nc h boyc ot t of E U m e e t i ngs , t h e e ve nt ua l
out c om e w a s t he 1966 L uxe m b our g c om pr om i s e w hi c h, a t l e a s t a c c or di ng
t o t he F r e nc h i nt e r pr e t a t i on ( n ow s ha r e d by t he B r i t i s h) , pr e s e r ve s t he
na t i ona l ve t o i f a c ount r y i nvoke s i t s “ vi t a l na t i ona l i nt e r e s t s ” e ve n i n
l e gi s l a t i on m e a nt t o be de c i de d by t he s ys t e m of qua l i f i e d- m a j or i t y vot i ng
e ns hr i ne d i n t he R om e t r e a t y a nd l a t e r s t r e ngt he ne d i n t he S i ngl e E ur ope a n
A c t .
T he i nf l ue nc e a nd pow e r of l a t e r C om m i s s i ons ha ve f l uc t ua t e d, but t he
i ns t i t ut i on r e a c he d i t s a poge e unde r t he pr e s i de nc y of J a c que s D e l or s a f t e r
1984. H e w a s a dr i vi ng f or c e be hi nd bot h t he s i ngl e m a r ke t a nd t he s i ngl e
c ur r e nc y; i nde e d , i n t he l a t e 1980s he t ur ne d i nt o a ha t e – f i gur e f or B r i t i s h
a nt i – E ur ope a ns ( a nd f or M a r ga r e t T ha t c he r ) a f t e r he a ddr e s s e d t he T r a de s
U ni on C ongr e s s i n 1988. H e w a s huge l y i m por t a nt f or t he a dopt i on of
E M U . Y e t hi s i nf l ue nc e i n B r us s e l s ha d di m i ni s he d l ong be f or e he s t e ppe d
dow n f r om t he j ob, s om e w ha t di s i l l us i one d, i n 1994.1 A nd ne i t he r of hi s
f i r s t t w o s uc c e s s or s a s C om m i s s i on pr e s i de nt , J a c que s S a nt e r a nd R om a no
P r odi , w a s a bl e t o r e – e s t a bl i s h t he i ns t i t ut i on’ s pr e vi ous pr e – e m i ne nc e .
W he n t he P or t ugue s e pr i m e m i ni s t e r , J os é M a nue l B a r r os o, t ook ove r
a s C om m i s s i on pr e s i de nt i n 2004, he a l l i e d hi m s e l f f i r m l y w i t h
l i be r a l i s i ng c ou nt r i e s s uc h a s t he U K , t he N e t he r l a nds a nd, t o a l e s s e r
e xt e nt , G e r m a ny ( w hi l e not ne gl e c t i ng t he i nt e r e s t s of hi s ow n c ount r y) .
U nde r hi m t he C om m i s s i on ha s c ont i nue d t o pl a y a c r uc i a l r ol e i n
pr ovi di ng a na l ys i s , i m pl e m e nt i ng t he r ul e s a nd dr a w i ng up l e gi s l a t i ve
c om pr om i s e s , a s w e l l a s pr ot e c t i ng t he i nt e r e s t s of s m a l l e r c ount r i e s a nd
of a w i de r E ur ope . B ut i t ha s pr ove d ha r d t o r e s t or e t he C om m i s s i on’ s
pol i t i c a l c l out a t a t i m e of r i s i ng s c e pt i c i s m i n publ i c vi e w s of t he
E ur ope a n U ni o n. M a ny na t i ona l gove r nm e nt s ha ve c om e t o s e e t he
C om m i s s i on a s t oo ke e n on pe t t y r e gul a t i on a nd t oo r e a dy t o a ppe a s e t he
E ur ope a n P a r l i a m e nt , m ovi ng a w a y f r om i t s s uppos e dl y ne ut r a l pos i t i on
be t w e e n P a r l i a m e nt a nd C ounc i l – a pe r c e pt i on t ha t i s l i ke l y t o gr ow now
t ha t , unde r t he L i s bon t r e a t y , t he P a r l i a m e nt ha s be e n gi ve n t he e xpl i c i t
r ol e of “ e l e c t i n g” t he C om m i s s i on pr e s i de nt a f t e r he or s h e ha s be e n
nom i na t e d by he a ds of gove r nm e nt .2

A s t he C om m i s s i on’ s pol i t i c a l i nf l ue nc e ha s w a ne d, t he P a r l i a m e nt ’ s
ha s w a xe d. B e s i de s i t s ne w r ol e i n t he c hoi c e of a ne w pr e s i de nt , t he c o-
de c i s i on pr oc e d ur e f or a l m os t a l l l e gi s l a t i on unde r t he L i s bon t r e a t y ha s
gi ve n i t e xt r a pow e r s . I n i t s w or k on t he ne w e xc e s s i ve – de f i c i t s pr oc e dur e
dur i ng t he e ur o c r i s i s , t he P a r l i a m e nt pl a ye d a pos i t i ve r ol e , e s pe c i a l l y
ove r t he ne w s i x- a nd t w o- p a c k l e gi s l a t i on, w hi c h i t s e c onom i c a nd
m one t a r y a f f a i r s c om m i t t e e unde r a B r i t i s h M E P , S ha r on B ow l e s , he l pe d
t o s ha pe . Y e t na t i ona l gove r nm e nt s a nd E U l e a de r s , e ve n t hos e
t r a di t i ona l l y ke e n t o gi ve t he P a r l i a m e nt m or e pow e r s , a r e now a da ys
i nc r e a s i ngl y di s i l l us i one d w i t h i t . T hi s w a s e s pe c i a l l y obvi ous dur i ng
r e pe a t e d r ow s ove r t he E U budge t a nd t he m ul t i – a nnua l f i na nc i a l
f r a m e w or k dur i ng 2013: t he P a r l i a m e nt ’ s i ns t i nc t i ve pus h f or e ve n m or e
E U s pe ndi ng t ha n t he C om m i s s i on ha d a s ke d f or w on i t f e w f r i e nds a m ong
ne t c ont r i but or c ount r i e s . T he g r ow i ng pr e s e nc e of popul i s t a nd e xt r e m i s t
pa r t i e s i n t he P a r l i a m e nt , w hi l e m a ki ng i t m or e r e pr e s e nt a t i ve , w i l l not
i m pr ove i t s i m a ge w i t h na t i ona l gove r nm e nt s .3
T he bi gge s t w i nne r f r om t he e u r o c r i s i s a m ong t he E U i ns t i t ut i ons ha s
be e n t he E ur ope a n C ounc i l of he a ds of s t a t e a nd gove r nm e nt , be c a us e i t
br i ngs t o ge t he r t he 28 na t i ona l l e a de r s . T ha t i s pa r t l y be c a us e H e r m a n V a n
R om puy , t he l i t t l e – know n, ha i ku- w r i t i ng B e l gi a n pr i m e m i ni s t e r w ho w a s
pi c ke d t o be t he E ur ope a n C ounc i l ’ s f i r s t pe r m a ne nt pr e s i de nt ( a nd w a s
pr om pt l y a c c us e d by N i ge l F a r a ge , l e a de r of t he U K I nde pe nde nc e P a r t y ,
of h a vi ng “ a l l t he c ha r i s m a of a da m p r a g a nd t he a ppe a r a nc e of a l ow –
gr a de ba nk c l e r k” ) , ha s i n f a c t pr ove d a n a de pt c hoi c e . A s a n e c onom i s t
f r om a e ur o- z one c ount r y , he w a s good a t di a gnos i ng t he e ur o’ s i l l s ; he ha s
of t e n poi nt e d t o t he m a dne s s of not w a t c hi ng m or e c a r e f ul l y t he r i s e i n
c ur r e nt – a c c ount de f i c i t s . F r om hi s ba c kgr ound i n B e l gi a n pol i t i c s he ha s
a l s o l e a r nt t he a r t of pol i t i c a l c om pr om i s e . H i s a bi l i t y t o s pe a k E ngl i s h,
F r e nc h a nd G e r m a n, s ha r e d a l s o w i t h J e a n- C l a ude J unc ke r , w ho c ha i r e d
t he E ur ogr oup, ha s be e n us e f ul . T he j obs of E ur ope a n C ounc i l a nd
E ur ogr oup s um m i t pr e s i de nt ( w hi c h he a dde d) ha ve be c om e m or e
s i gni f i c a nt pa r t l y be c a us e of h ow he ha s done t he m . A nd, f or t he m os t
pa r t , he ha s f or ge d a good w or ki ng r e l a t i ons hi p w i t h B a r r os o, w i t h t he
C om m i s s i on c on t i nui ng t o pr ovi de m uc h of t he t e c hni c a l a nd l e ga l s uppor t
f or t he w or k of t he E ur ope a n C ounc i l .

T he m a i n r e a s on t he E ur ope a n C ounc i l i s w he r e t he a c t i on now
ha ppe ns i s t ha t t he e ur o c r i s i s ha s i nc r e a s e d t he c l out of na t i ona l
gove r nm e nt s . T hi s i s l a r ge l y be c a us e onl y na t i ona l gove r nm e nt s c a n
c om m a nd t he r e s our c e s ne e de d t o ba i l out e xc e s s i ve l y i nde bt e d c ount r i e s
or ba nk s . I t i s a l s o be c a us e , t o r a i s e t he ne c e s s a r y m one y , m os t
gove r nm e nt s ha ve ne e de d t o s e c ur e t he c ons e nt of t he i r na t i ona l
pa r l i a m e nt s . I n e f f e c t , t he e ur o c r i s i s ha s l a i d ba r e a t e nde nc y t ha t c oul d be
de t e c t e d l ong be f or e 2009. T hi s i s t ha t na t i ona l gove r nm e nt s a nd t he i r
l e a de r s ( w i t h a n i nc r e a s i ngl y l a r ge r ol e pl a ye d by f i na nc e m i n i s t e r s a t t he
e xpe ns e of f or e i gn m i ni s t e r s , f or m e r l y t he m a i n a c t or s i n B r u s s e l s ) ha ve
be c om e t he dr i vi ng f or c e of t he e ur o z one a nd, by e xt e ns i on, of t he E U a s
a w hol e .
B r oa d pol i t i c a l pow e r i s t hus s h i f t i ng f r om t he s upr a na t i ona l E ur ope a n
i ns t i t ut i ons a nd t ow a r ds na t i ona l gove r nm e nt s t ha nks t o t he e ur o c r i s i s .
Y e t a t t he s a m e t i m e m a ny m o r e i nt r us i ve pow e r s a r e be i ng ve s t e d a t t he
E U l e ve l , be c a us e t he e ur o z one ha s be e n f or c e d t o m ove i n t he di r e c t i on
of gr e a t e r pol i t i c a l a s w e l l a s e c onom i c i nt e gr a t i on. T he E C B i s t a ki ng on
t he s upe r vi s i on of m os t e ur o- z o ne ba nks , f or e xa m pl e , a nd i t w i l l a l s o ga i n
t he pow e r t o r e qui r e t he m t o i nc r e a s e t he i r c a pi t a l or , i n s om e c a s e s , t o
s hut t he m dow n. A s pa r t of t he E ur ope a n s e m e s t e r , t he C om m i s s i on i s
ge t t i ng e xt e ns i ve ne w m oni t or i ng pow e r s , i nc l udi ng t he pos s i bi l i t y of
s a nc t i ons , ove r na t i ona l budge t s . T he P a r l i a m e nt i s a r r oga t i ng t o i t s e l f t he
j ob of s c r ut i ni s i ng c ont r a c t s f o r r e f or m t ha t a r e be i ng de ba t e d a nd c oul d
ye t be dr a w n up be t w e e n na t i ona l gove r nm e nt s a nd B r us s e l s . W ha t
e xpl a i ns t he pa r a doxi c a l c om bi na t i on of gr e a t e r i nt r us i ve pow e r s w i t hi n
t he e ur o z one a nd t he de c l i ni ng i nf l ue nc e of t he E U i ns t i t ut i ons ?
C o u n t r y – c l u b r u l e s
T he a ns w e r i s t o be f ound i n t he s hi f t i ng ba l a nc e of pow e r a m ong E U
c ount r i e s , w hi c h i s pe r ha ps w he r e t he gr e a t e s t i m pa c t of t he e ur o c r i s i s c a n
be s e e n. T he unde r l yi ng f i c t i on of t he E ur ope a n pr oj e c t f r om t he be gi nni ng
w a s t ha t m e m be r c ount r i e s w e r e br oa dl y e qua l . M os t i ns t i t ut i ons w or ke d
on t he ba s i s of one r e pr e s e nt a t i ve pe r c ount r y , a l t hough unt i l t he N i c e
t r e a t y bi g c ount r i e s w e r e e nt i t l e d t o t w o c om m i s s i one r s . A dm i t t e dl y ,
qua l i f i e d- m a j or i t y vot i ng i n t he C ounc i l ga ve m or e w e i ght t o bi g t ha n t o

s m a l l c o unt r i e s , but t he s ys t e m w a s s t i l l bi a s e d t ow a r ds t he s m a l l – a nd
t he m os t i m por t a nt de c i s i ons w e r e a l m os t a l w a ys t a ke n una ni m ous l y .
S e a t s i n t he P a r l i a m e nt do r e f l e c t popul a t i on s i z e , but e ve n t he r e s m a l l
c ount r i e s ha ve t e nde d t o be ove r r e pr e s e nt e d ( M a l t a ha s pr opor t i ona t e l y
f i ve t i m e s a s m a ny M E P s a s G e r m a ny) .
Y e t de s pi t e a l l t hi s , t he not i on of e qua l i t y w i t hi n t he E U r e m a i ns
l a r ge l y f a l s e . I n pr a c t i c e , t w o c ount r i e s ha ve a l w a ys a c t e d a s t he pr i nc i pa l
e ngi ne i n t he E ur ope a n m ot or : F r a nc e a nd G e r m a ny . I t a l y , t h e ot he r bi g
c ount r y i n t he o r i gi na l s i x, ha s ne ve r be e n a bl e t o m a t c h t he c l out of t he s e
t w o, pa r t l y be c a us e f or m a ny ye a r s i t s pol i t i c a l s ys t e m l e d t o f r e que nt
e l e c t i ons a nd i nnum e r a bl e c ha nge s of pr i m e m i ni s t e r , a nd pa r t l y be c a us e ,
a f t e r a l ong pe r i od of c a t c h- up gr ow t h t ha t l a s t e d i nt o t he 1980s , i t s
e c onom i c pe r f or m a nc e ha s be e n s o di s m a l . A l t hough t he N e t he r l a nds ha s
oc c a s i ona l l y di s s e nt e d, a nd ha s a l s o i n r e c e nt ye a r s t ur ne d not i c e a bl y m or e
s c e pt i c a l t ow a r ds t he E ur ope a n i ns t i t ut i ons , t he B e ne l ux t r i o ha ve
ge ne r a l l y be e n w i l l i ng t o go a l o ng w i t h F r a nc o- G e r m a n l e a de r s hi p. I t ha s
be e n ha r d f or a ny ne w c om e r s , i nc l udi ng l a r gi s h c ount r i e s s uc h a s t he U K ,
S pa i n a nd P ol a nd, t o br e a k i n.
I n t he e a r l y ye a r s of t he E ur op e a n pr oj e c t , e s pe c i a l l y a f t e r t he E l ys é e
t r e a t y of 1963 t ha t c e m e nt e d l i nks be t w e e n t he t w o c ount r i e s , i t w a s
F r a nc e t ha t s a w i t s e l f a s i n t h e l e a d pol i t i c a l l y , l e a vi ng t he t he n W e s t
G e r m a ny t o pa y m os t of t he bi l l s . I nde e d, t hi s w a s one r e a s on t he F r e nc h
w e r e r e l uc t a nt t o l e t t he U K j oi n i n t he e a r l y 1960s : i n t he w or ds of t he
F r e nc h f or e i gn m i ni s t e r a t t he t i m e , t he y di d not w a nt a not he r c oc k on t he
dunghi l l . T he E U i ns t i t ut i ons , i nc l udi ng c om m i s s i one r s a nd t he i r c a bi ne t s ,
w e r e l a r ge l y de s i gne d on F r e nc h l i ne s . T he C om m i s s i on’ s f i r s t s e c r e t a r y-
ge ne r a l w a s F r e nc h. T he c om m on a gr i c ul t ur a l pol i c y , t he c om m on
f i s he r i e s pol i c y , t he c us t om s uni on a nd t he budge t w e r e a l l dr a w n up i n
m a ny w a ys t o t he be ne f i t of t he F r e nc h a t t he e xpe ns e of t h e G e r m a ns
( a nd, s ot t o v oc e , of t he B r i t i s h w he n t he y w e r e e ve nt ua l l y l e t i nt o t he c l ub
i n 1973) .
B y t he n t he r e l a t i ons hi p a c r os s t he R hi ne ha d be c om e m or e one of
e qua l s , a s ( W e s t ) G e r m a n e c ono m i c pow e r a s s e r t e d i t s e l f . T he r e s pons e of
s uc c e s s i ve F r e nc h pr e s i de nt s a nd G e r m a n c ha nc e l l or s w a s t o f or ge s t i l l
c l os e r b i l a t e r a l l i nks , e ve n t hough t he y of t e n c a m e f r om oppos i ng pol i t i c a l
f a m i l i e s : V a l é r y G i s c a r d d’ E s t a i ng w i t h H e l m ut S c hm i d t , F r a nç oi s

M i t t e r r a nd w i t h H e l m ut K ohl , J a c que s C hi r a c w i t h G e r ha r d S c hr öde r . I t
be c a m e unde r s t o od t ha t , i f F r a nc e a nd G e r m a ny c oul d a gr e e on s om e t hi ng,
s o ( m os t of t he t i m e ) c oul d t he r e s t . E ve n w he n t he pe r s ona l r e l a t i ons hi p
w a s s c r a t c hy , t he i ns t i t ut i ona l b ond be t w e e n t he t w o c ount r i e s w a s c l os e .
T he U K ’ s a t t e m pt s t o i ns e r t i t s e l f i nt o a pos s i bl e t r i l a t e r a l r e l a t i ons hi p
us ua l l y f a i l e d: t he pr i m e m i ni s t e r w ho c a m e c l os e s t t o pul l i ng t hi s of f w a s
T ony B l a i r , but hi s E ur ope a n c r e de nt i a l s w e r e t a r ni s he d w he n t he U K
de c l i ne d t o j oi n t he e ur o, a nd e ve n m or e s o w he n he l a t e r ba c ke d G e or ge
B us h’ s w a r i n I r a q, ve he m e nt l y oppos e d by bot h t he F r e nc h a nd G e r m a n
l e a de r s .
B y t hi s t i m e , how e ve r , t he F r a nc o- G e r m a n r e l a t i ons hi p w a s be c om i ng
m or e obvi ous l y l ops i de d. T he t ur ni ng poi nt c a m e w i t h G e r m a n uni f i c a t i on
i n 1 990, w hi c h m a de G e r m a ny s i gni f i c a nt l y bi gge r t ha n F r a nc e bot h i n
popul a t i on a nd i n e c onom i c w e i ght . T ha t w a s i nde e d one r e a s on
M i t t e r r a nd pus h e d s o ha r d f or a s i ngl e E ur ope a n c ur r e nc y: he hope d t ha t i t
w oul d gi ve F r a nc e m or e s a y i n e c onom i c a nd m one t a r y pol i c y , w hi c h w a s
i nc r e a s i ngl y be i ng di c t a t e d f or a l l E U m e m be r s by t he G e r m a n
B unde s ba nk. B ut a s t he ye a r s w e nt by , i t be c a m e e ve r m or e obvi ous t ha t
t he F r a nc o- G e r m a n r e l a t i ons hi p ha d be c om e a m e c ha ni s m t ha t w a s
de pl oye d t o di s gui s e G e r m a n s t r e ngt h a nd F r e nc h w e a kne s s .
T he r e w a s a br i e f r e s pi t e a t t he s t a r t of t he e ur o w he n t he G e r m a n
e c onom y l ooke d pa r t i c ul a r l y w e a k, pa r t l y be c a us e G e r m a ny ha d j oi ne d t he
e ur o a t a r e l a t i ve l y hi gh pa r i t y . T he E c onom i s t , e c h oi ng H a ns – W e r ne r S i nn,
a G e r m a n e c onom i s t , c a l l e d G e r m a ny t he s i c k m a n of E ur ope a s r e c e nt l y
a s 2003.4 B ut G e r m a n i ndus t r y r e s ponde d t o t he c ha l l e nge by
de t e r m i ne dl y c ut t i ng c os t s a nd hol di ng dow n w a ge s , w hi l e t he S c hr öde r
gove r nm e nt ’ s A ge nda 2010 r e f or m s of t he l a bour m a r ke t a nd w e l f a r e
s ys t e m i nc r e a s e d t he G e r m a n e c onom y’ s f l e xi bi l i t y . R i s i ng de m a nd f r om
C hi na f or G e r m a n- m a de m a c h i ne t ool s a nd ot he r pr oduc t s a l s o boos t e d
G e r m a n e xpor t s . T he r e s ul t w a s t ha t , by t he t i m e t he e ur o c r i s i s br oke out
ope nl y i n 2009–10, t he ga p i n e c onom i c a nd f i na nc i a l s t r e ngt h be t w e e n t he
t w o l e a di ng c ount r i e s i n t he e ur o ha d be c om e ga pi ngl y w i de .
G e r m a n y ’ s m o m e n t

T hi s pr e s e nt e d a bi g ne w c ha l l e nge t o t he ne xt i nc a r na t i on of t he dua l
l e a de r s hi p, a f t e r M a y 2007: N i c ol a s S a r koz y a s F r e nc h pr e s i de nt a nd
A nge l a M e r ke l a s G e r m a n c h a nc e l l or . T r ue t o f or m a nd d e s pi t e bot h
c om i ng f r om t he c e nt r e – r i ght , t he i r r e l a t i ons hi p got of f t o a r oc ky s t a r t , not
l e a s t be c a us e t he y w e r e pol a r oppos i t e s i n s t yl e . S a r koz y i s a ne r vy ,
hype r a c t i ve s how m a n. M e r ke l w a s a c a ut i ous , s om e w ha t dour s c i e nt i s t .
T he t w o w e r e know n t o f i nd e a c h ot he r unbe a r a bl e e ve n t hough t he y ha d t o
w or k t oge t he r – i n E ngl i s h, n o l e s s , be c a us e ne i t he r s poke t he ot he r ’ s
l a ngua ge . T he y qui c kl y c l a s he d a f t e r S a r koz y be c a m e pr e s i de nt w he n he
f l oa t e d pl a ns f or a ne w “ M e di t e r r a ne a n U ni on” t ha t a ppe a r e d t o be m e a nt
t o e xc l ude G e r m a ny . B ut i t w a s t he gl oba l f i na nc i a l c r i s i s t ha t r e a l l y t e s t e d
t he m .
A t f i r s t F r a nc e s e e m e d t o f a r e be t t e r dur i ng t he c r unc h t ha n G e r m a ny
( a nd i nd e e d t he U K ) , w i t h a m u c h s m a l l e r l os s of G D P i n 2008–09.5 A l ong
w i t h t he B r i t i s h pr i m e m i ni s t e r , G or don B r ow n, S a r koz y pl a ye d a bi g r ol e
i n m e e t i ngs of t he G 8 a nd G 20 t ha t t r i e d t o c o- or di na t e a n i nt e r na t i ona l
f i s c a l bo os t t o s t op t he c r i s i s t ur ni ng a n i ne vi t a bl e r e c e s s i on i nt o a de e p
1930s – s t yl e de p r e s s i on. A t one poi nt , he e ve n c he e ki l y a nnounc e d t o t he
pr e s s t ha t F r a nc e w a s a c t i ng w hi l e G e r m a ny w a s m e r e l y t hi nki ng a bout i t .
B ut w he n t he e ur o c r i s i s e r upt e d i n 2010 t he s t r uc t ur a l w e a kne s s a nd
r e l a t i ve l y gr e a t e r i nde bt e dne s s of F r a nc e c om pa r e d w i t h G e r m a ny s oon
be c a m e a huge pr obl e m .
L i ke s o m a ny of hi s pr e de c e s s or s , S a r koz y’ s r e s pons e w a s t o t r y t o ge t
c l os e r t o M e r ke l . H e pl a ye d up F r a nc e ’ s A A A r a t i ng a s a ke y a s s e t
unde r pi nni ng t he s uc c e s s i ve r e s c ue f unds t ha t ha d t o be de vi s e d f or
G r e e c e , I r e l a nd , P or t uga l a nd l a t e r S pa i n a nd C ypr us . H e a nd M e r ke l
j oi ne d f or c e s t o s ugge s t pol i c y c ha nge s s uc h a s , a t D e a uvi l l e i n O c t obe r
2010, t he i nvol unt a r y i nvol ve m e nt of t he pr i va t e s e c t or i n f ut ur e de bt
r e s t r uc t ur i ngs . H e pus he d G e r m a n- i ns pi r e d f i s c a l a us t e r i t y a nd di d not
pr e s s ha r d f or a n i m m e di a t e a gr e e m e nt t o t he i s s ua nc e of E ur obonds . T he
m a r ke t s be ga n t o t a l k of “ M e r k oz y” a s t he ke y t a nde m s e e ki ng t o s t e e r t he
e ur o z one out of i t s de bt a nd g r ow t h c r i s e s . A nd t he t w o l e a de r s pl a ye d a
c r uc i a l r ol e i n 2 011 i n e ngi ne e r i ng t he de pa r t ur e s of S i l vi o B e r l us c oni i n
I t a l y a n d G e o r ge P a pa ndr e ou i n G r e e c e a nd t he i r r e pl a c e m e nt by
t e c hnoc r a t – l e d gove r nm e nt s .

Y e t a s t he c r i s i s dr a gge d on, t he pr e t e nc e t ha t F r a nc e c ount e d a s m uc h
a s G e r m a ny w or e t hi n. I nc r e a s i ngl y , i t w a s t he c ha nc e l l e r y , t he B unde s t a g
a nd t he G e r m a n c ons t i t ut i ona l c our t i n K a r l s r uhe , a s w e l l a s publ i c
opi ni on i n G e r m a ny , t ha t w e r e doi ng t he m os t t o de t e r m i ne t he s ha pe a nd
s pe e d of t he e ur o z one ’ s va r i ous r e s c ue pa c ka ge s . A s ot he r c ount r i e s ,
e s pe c i a l l y but not onl y t hos e t ha t ha d be e n ba i l e d out , c ut publ i c s pe ndi ng,
r e duc e d budge t de f i c i t s a nd pus he d t hr ough s t r uc t ur a l r e f or m s , a n
unc ha nge d a nd unc ha ngi ng F r a nc e s e e m e d t o be t ur ni ng i nt o pa r t of t he
pr obl e m r a t he r t ha n pa r t of t h e s ol ut i on. T o S a r koz y’ s e m ba r r a s s m e nt ,
F r a nc e l os t i t s f i r s t A A A r a t i ng i n e a r l y 2011. A nd t he n, i n M a y 2012, he
l os t t he pr e s i de nt i a l e l e c t i on t o t he S oc i a l i s t c a ndi da t e , F r a nç oi s H ol l a nde .
H ol l a nde w a s a s t r onge r pr o- E ur ope a n t ha n S a r koz y , a s w e l l a s be i ng
e a s i e r t o de a l w i t h on a pe r s ona l l e ve l . A l t hough he c a m e f r om t he
oppos i t e pol i t i c a l c a m p t o M e r ke l , he w a s on t he r i ght of h i s S oc i a l i s t
P a r t y . Y e t a s t he m a n w ho l e d t he pa r t y w he n i t s pl i t ove r t he r e f e r e ndum
on t he E U ’ s c ons t i t ut i ona l t r e a t y i n 2005, he w a s w a r y of a ny ne w t r e a t y
c ha nge s t ha t t he G e r m a ns m i ght s e e k. M or e ove r , be f or e hi s e l e c t i on he
s poke out s t r ongl y a ga i ns t M e r ke l ’ s a us t e r i t y pol i c i e s a nd i n f a vour of
m or e gr ow t h; he w a nt e d t o s e e s om e f or m of de bt m ut ua l i s a t i on, w hi c h
w a s a na t he m a t o M e r ke l ; a nd dur i ng t he c a m pa i gn he s a i d ne xt t o not hi ng
a bout t he ne e d f or s t r uc t ur a l r e f or m s or publ i c – s pe ndi ng c ut s a t hom e ,
i ns t e a d pr opos i ng t a x i nc r e a s e s , i nc l udi ng a ne w 75% t op r a t e of i nc om e
t a x.6 A f t e r h e c a m e t o pow e r , f a r f r o m s e e ki ng t o r e i nvi gor a t e t he F r a nc o-
G e r m a n a xi s , he t r i e d t o m a ke c om m on c a us e w i t h t he I t a l i a n a nd S pa ni s h
l e a de r s i n ur gi ng m or e gr ow t h- or i e nt e d pol i c i e s i n pl a c e of e xc e s s i ve
a us t e r i t y .
T he r e s pons e f r om G e r m a ny w a s f r i gi d i n t he e xt r e m e . A f t e r t w o ye a r s
of c r i s i s – f i ght i n g, t he l a s t t hi ng M e r ke l w a nt e d w a s t o s e e a w e a ke ne d
F r a nc e de s e r t i ng t he “ nor t he r n” c a m p of c r e di t or c ount r i e s l i ke G e r m a ny ,
A us t r i a , t he N e t he r l a nds a nd F i nl a nd a nd j oi ni ng i ns t e a d t he “ s out he r n”
c a m p of de bt or s , w hos e i ns t i nc t i ve a ns w e r t o a ny pr obl e m w a s t o bor r ow
a nd s pe nd m or e . F r a nc e , i t w a s not e d da r kl y i n G e r m a ny , ha d not ba l a nc e d
i t s budge t s i nc e 1974. O ne r e a s on t he G e r m a ns de c i de d dur i ng 2012 t ha t i t
w oul d b e t oo da nge r ous t o l e t a ny c ount r y , e ve n G r e e c e , l e a ve t he e ur o w a s

be c a us e t he y f e a r e d t ha t i t m i ght l e a d t o t he c ur r e nc y e ve nt ua l l y
unr a ve l l i ng a l l t he w a y up t o t he R hi ne .
I n s h or t , F r a nc e ha d now be c om e , i n G e r m a n e ye s , pa r t of t he pr obl e m
a nd not of t he s ol ut i on. A t a budge t s um m i t i n F e br ua r y 2013 H ol l a nde
w a s s o di s t a nt f r om t he G e r m a n pos i t i on t ha t he e ve n f a i l e d t o s how up f or
a bi l a t e r a l m e e t i ng w i t h M e r ke l , s om e t hi ng unhe a r d of be f or e . A s one
obs e r ve r of E U s um m i t s not e d, e ve r ybody a l w a ys s t oppe d t o l i s t e n t o
M e r ke l ; nobody pa i d a ny a t t e nt i on w he n H ol l a nde t ook t he f l oor , i ns t e a d
f i ddl i ng w i t h t he i r B l a c kB e r r i e s a nd i P hone s . T he m a r gi na l i s a t i on of
F r a nc e i s a l s o de nt i ng publ i c opi ni on i n t ha t c ount r y , w hi c h i s i nc r e a s i ngl y
t ur ni ng a ga i ns t bot h t he e ur o a nd t he E U . T he F r e nc h i ndus t r y m i ni s t e r ,
A r na ud M ont e bour g, ha s t a ke n t o a t t a c ki ng t he E U f or i t s “ f r e e – m a r ke t
f unda m e nt a l i s m ” . A not he r s t r i ki ng e xa m pl e e ve n a m ong t he pr o- E ur ope a n
e l i t e w a s a 2013 book by F r a nç oi s H e i s bour g, f r om t he F ou nda t i on f or
S t r a t e gi c R e s e a r c h, i n w hi c h he a r gue d t ha t t he e ur o s houl d be s c r a ppe d i n
or de r t o pr e s e r ve t he E ur ope a n U ni on.7
A n g e l a a l o n e
I n e f f e c t , E ur ope onc e a ga i n h a s w ha t hi s t or i a ns ha ve c a l l e d a G e r m a n
pr obl e m ( w i t h pl e nt y of r e a s on t o hope t ha t t he s ol ut i on w i l l be m or e
pe a c e f ul t ha n i n t he pa s t ) . T he r e vi va l of a G e r m a n pr obl e m i s not a t a l l
c om f or t a bl e f or M e r ke l . F ol l ow i ng t he de pa r t ur e of J e a n- C l a ude J unc ke r
a s pr i m e m i ni s t e r of L uxe m bour g i n l a t e 2013 a nd of E s t oni a ’ s A nde r s
A ns i p i n 2014, s he i s t he l onge s t – s e r vi ng na t i ona l l e a de r i n t he E U . W i t h
F r a nc e s o w e a k a nd H ol l a nde s o i ne f f e c t ua l , s he i s a l s o t he un c ha l l e nge d
he a d of t he n or t he r n c r e di t or c a m p i n E ur ope . A nd w i t h G e r m a n
une m pl oym e nt a nd yout h une m pl oym e nt bot h a t 20- ye a r l ow s , G D P ba c k
a bove p r e – c r i s i s l e ve l s , a budge t c l os e t o ba l a nc e a nd a c ont i nui ng huge
c ur r e nt – a c c ount s ur pl us , he r c ount r y i s t he unc ont e s t e d e c onom i c he ge m on
of E ur ope . F r a nc e a nd I t a l y a r e , a t be s t , bys t a nde r s ; a t w or s t , l a r ge l y
i r r e l e va nt .
Y e t G e r m a ny r e m a i ns a r e l uc t a nt he ge m on, not l e a s t f or hi s t or i c a l
r e a s ons . I t s f or e i gn a nd de f e nc e pol i c i e s a r e i nw a r d- l ooki ng, c om m e r c i a l l y
dr i ve n a nd i ns t i nc t i ve l y pa c i f i s t , unl i ke t he U K ’ s a nd F r a nc e ’ s . M e r ke l
m a y e nj oy w i e l di ng pow e r i n E ur ope , a nd be i ng s e e n by t he r e s t of t he

w or l d a s t he c ont i ne nt ’ s m os t i m por t a nt l e a de r , but ne i t he r s he nor he r
c ount r y i s e nt i r e l y ha ppy be i ng t r e a t e d t oo ope nl y a s s uc h. P os t – w a r
G e r m a n c ha nc e l l or s ha ve t r a di t i ona l l y s e e n m or e E ur ope a s t he a ns w e r t o
t he G e r m a n pr obl e m . B ut t o c r i t i c s of M e r ke l , e s pe c i a l l y dur i ng t he e ur o
c r i s i s , he r c a l l f or m or e E ur op e ha s of t e n s e e m e d l i ke a c a l l f or a m or e
G e r m a n E ur ope , a n e f f or t t o t r a ns f or m a l l e ur o- z one c ount r i e s i nt o m i ni –
G e r m a nys . T he s e ns i t i vi t y t hi s a r ous e s w a s w e l l de m ons t r a t e d i n
N ove m be r 2011 w he n a publ i c c l a i m by V ol ke r K a ude r , c ha i r m a n of t he
B unde s t a g’ s f or e i gn a f f a i r s c om m i t t e e , t ha t “ s udde nl y , E ur ope i s s pe a ki ng
G e r m a n” w a s s w i f t l y di s ow ne d by m os t of hi s c ol l e a gue s .8
G e r m a ny , i n s hor t , r e m a i ns hi g hl y a t t une d t o out s i de c r i t i c i s m . I t a l s o
ha s m a ny bl i nd s pot s e c onom i c a l l y . T hi s not onl y e m br a c e s t he c r ude
c a r i c a t ur e s of M e r ke l w i t h a m ous t a c he a nd t a l k of a ne w T hi r d R e i c h t ha t
a r e s e e n a nd he a r d i n G r e e c e a n d e l s e w he r e . I t a l s o i nc l ude s m or e s e r i ous
c om pl a i nt s f r om t he l i ke s of t he I M F a nd t he U S T r e a s ur y t ha t G e r m a ny
r e l i e s t oo m uc h on e xpor t s a n d t oo l i t t l e on dom e s t i c c ons um pt i on f or
gr ow t h; a nd t ha t , by r unni ng s uc h a l a r ge c ur r e nt – a c c ount s ur pl us ,
de t e r m i ne dl y hol di ng dow n w a ge s a nd f a i l i ng t o ge ne r a t e s uf f i c i e nt
i nt e r na l de m a nd, t he G e r m a ns c ont r i but e d t o t he pr obl e m s of t he e ur o
z one i n t he f i r s t pl a c e .
S uc h c l a i m s a r e vi gor ous l y r e j e c t e d i n G e r m a ny . E ve r s i nc e t h e G r e e k
c r i s i s e r upt e d i n l a t e 2009, t he G e r m a ns ha ve s e e n t w o r oot s of t he
pr obl e m : f i s c a l pr of l i ga c y a nd a l os s of c om pe t i t i ve ne s s . O n t hi s
di a gnos i s , t he c ur e f or t he f i r s t i s publ i c – s pe ndi ng c ut s a nd t a x r i s e s ; f or
t he s e c ond, i t i s s t r uc t ur a l r e f or m s t o l a bour a nd pr oduc t m a r ke t s t o r e duc e
uni t l a bour c os t s a nd r e s t or e c om pe t i t i ve ne s s . G e r m a ny ha s l ong ke pt i t s
publ i c f i na nc e s unde r be t t e r c ont r ol t ha n ot he r s a nd i t a l s o pus he d t hr ough
t he A ge nda 2010 r e f or m s i n 20 03. O t he r e ur o- z one c ount r i e s s i m pl y ha ve
t o c opy t hi s e xa m pl e . T he not i o n t ha t G e r m a ny m i ght ne e d t o do m or e , f or
i ns t a nc e i nc r e a s i ng w a ge s or publ i c s pe ndi ng, or boos t i ng dom e s t i c
i nve s t m e nt , i s of t e n gr e e t e d w i t h di s be l i e f . G e r m a n bus i ne s s , i t i s s a i d i n
r e pl y , m us t c om pe t e on a gl oba l s t a ge ; t r yi ng t o r e ba l a nc e w i t hi n E ur ope
by m a ki ng i t l e s s c om pe t i t i ve e xt e r na l l y w oul d be di s a s t r ous f or t he e nt i r e
c ont i ne nt . T ha t t he c oa l i t i on a gr e e m e nt i n G e r m a ny m a y ha ve t hi s e f f e c t ,

by i nt r oduc i ng a hi gh m i ni m um w a ge a nd l ow e r i ng t he r e t i r e m e nt a ge f or
c e r t a i n w or ke r s , r e f l e c t s pol i t i c s r a t he r t ha n pol i c y c hoi c e s .
A s M e r k e l ha s c om e i nc r e a s i n gl y t o be t he m a i n or e ve n on l y voi c e
t ha t c ount s i n t he e ur o c r i s i s , s he ha s a l s o be c om e m or e dubi ou s a bout t he
va l ue of t he E U i ns t i t ut i ons . A dm i t t e dl y , s he ha s qui e t l y s i d e d w i t h t he
E C B a ga i ns t c r i t i c i s m s f r om t he B unde s ba nk, e ve n w he n t w o of he r m os t
l oya l l i e ut e na nt s , A xe l W e be r a nd J ür ge n S t a r k, r e s i gne d i n pr ot e s t . B ut
s he ha s dr a gge d he r f e e t on ba nki ng uni on, a nd he r r e s pons e t o c a l l s f r om
t he C om m i s s i on or f r om ot he r E ur ope a n c ount r i e s f or de bt m ut ua l i s a t i on
ha s be e n c ol d. F or he r , ke e pi ng i n l i ne w i t h publ i c opi ni on a t hom e a nd
s a t i s f yi ng bot h t he B unde s t a g a nd t he c ons t i t ut i ona l c our t i n K a r l s r uhe
m a t t e r f a r m or e t ha n a ny dr e a m y e ur o- f e de r a l i s t vi s i on. S he ha s a t t i m e s
be e n c r i t i c i s e d by s uc h pr e de c e s s or s a s H e l m ut K ohl a nd H e l m ut S c hm i dt
f or t hi s . T he c ur r e nt c oa l i t i on a gr e e m e nt s ugge s t s a num be r of c ha nge s t o
t he C om m i s s i on, i nc l udi ng r e duc i ng i t s pr ope ns i t y t o r e gul a t e .
I t m us t be c onc e de d t ha t , a t l e a s t f or M e r ke l , t hi s a ppr oa c h t o E ur ope
ha s w or ke d w onde r s . F or a l l t h e br i c kba t s hur l e d a t he r , e s pe c i a l l y f r om
a br oa d, f or be i ng t oo s l ow t o m ove , t oo e a ge r t o i m pos e a us t e r i t y on t he
M e di t e r r a ne a n, t oo unw i l l i ng t o boos t de m a nd a t hom e a nd t oo l e e r y of
e xpl a i ni ng t o G e r m a ns how m uc h t he y w oul d l os e i f t he e ur o w e r e t o
br e a k up, s he ha s r e t a i ne d e nor m ous popul a r i t y a t hom e . A l m o s t a l l ot he r
e ur o- z one c ount r i e s ha ve s e e n t he i r l e a de r s pus he d out by vot e r s a s a
r e s ul t of t he e ur o c r i s i s . M e r ke l , how e ve r , t ook a n i m pr e s s i ve 42% of t he
vot e i n t he f e de r a l e l e c t i on i n S e pt e m be r 2013, a nd s he ha s s i nc e gone on
t o f or m a gr a nd c oa l i t i on w i t h t he S oc i a l D e m oc r a t s t ha t c l e a r l y l e a ve s he r
a nd he r f i na nc e m i ni s t e r , W ol f g a ng S c hä ubl e , i n c ha r ge of G e r m a n pol i c y
on t he e ur o. G e r m a n vot e r s , i t s e e m s , i ns t i nc t i ve l y t r us t he r bot h t o do t he
r i ght t hi ng a nd t o pr ot e c t t he i r i nt e r e s t s .
M e d i t e r r a n e a n a n g s t , n o r t h e r n b r a v a d o
W or r i e s a bout F r e nc h w e a kne s s a nd a bout be i ng l one l y a t t he t op ha ve
pr om pt e d t he G e r m a ns t o l ook a r ound f or ot he r pot e nt i a l pa r t ne r s i n t he
E ur ope a n U ni on. T he U K i s out , a s i t i s s e e n a s t oo s e m i – de t a c he d f r om
t he pr oj e c t . T he M e di t e r r a ne a n c ount r i e s a r e a l s o br oa dl y no good. M os t
of t he m ha ve r e c e i ve d he l p f r om E ur ope a n ba i l – out f unds a nd a r e s t i l l

s t r uggl i ng t o c om pl y w i t h t he i r r e f or m pr ogr a m m e s a nd s or t out t he i r
ba nks . S pa i n i s l i ke l y t o be t he f i r s t t o c om e good but s t i l l f a c e s s e ve r e
e c onom i c a nd pol i t i c a l di f f i c ul t i e s . O nl y I r e l a nd ha s be c om e t he G e r m a n
pos t e r – c hi l d f or how a ba i l e d- out c ount r y c a n c ha nge i t s e l f .
I t a l y i s t he pe r p e t ua l unde r pe r f o r m e r i n t he E U : a bi g e c onom y , s e c ond
onl y t o G e r m a ny i n m a nuf a c t ur i ng, but s e e m i ngl y i nc a pa bl e of r e f or m i ng
i t s e l f t o r e ga i n l os t c om pe t i t i ve ne s s . A l one a m ong e ur o- z one c ount r i e s i t s
i nc om e pe r he a d i s l ow e r now t ha n w he n t he e ur o be ga n i n 19 99. D ur i ng
hi s br i e f t e c hnoc r a t i c a dm i ni s t r a t i on i n 2011–12, M a r i o M ont i pr om i s e d t o
be a f i r m a l l y of M e r ke l ’ s , a nd he t r i e d, w i t h onl y pa r t i a l s uc c e s s , t o pus h
t hr ough s t r uc t ur a l r e f or m s , i nc l udi ng t o pe ns i ons . B ut a t E U m e e t i ngs he
t e nde d t o s i de w i t h t hos e c r i t i c i s i ng G e r m a ny f or not doi ng e nough t o
boos t do m e s t i c de m a nd a nd t he E C B f or f a i l i ng t o a c t t o l ow e r i nt e r e s t
r a t e s i n t he pe r i phe r y . I t a l y ha s t r a di t i ona l l y f a vour e d e ve r – c l os e r uni on i n
E ur ope , on t he ba s i s t ha t m a ny I t a l i a ns pr e f e r r ul e f r om B r us s e l s t o r ul e
f r om R om e , but s uc h a n a ppr oa c h i s now out of f a vour i n G e r m a ny .
M ont i w a s f or c e d t o c a l l a n e l e c t i on i n F e br ua r y 2013 i n w hi c h he di d
ba dl y . A f t e r c om pl e x ba r ga i ni ng , E nr i c o L e t t a , t he young de pu t y l e a de r of
I t a l y’ s c e nt r e – l e f t D e m oc r a t i c P a r t y , s uc c e e de d i n put t i ng t oge t he r a br oa d
c oa l i t i on t oge t he r w i t h B e r l us c o ni ’ s P e opl e of F r e e dom ( P dL ) pa r t y a nd a
s c a t t e r i ng of c e nt r i s t s – t he s a m e br oa d c oa l i t i on t ha t ha d ba c ke d M ont i .
T he c ou nt r y c a m e out of i t s e xc e s s i ve de f i c i t pr oc e dur e i n J une , gi vi ng
L e t t a a pol i t i c a l boos t , but I t a l y’ s pol i t i c s r e m a i ne d a s dys f unc t i ona l a s
e ve r . L e t t a f ound i t no e a s i e r t o e na c t r e f or m s t ha n di d M ont i . H e s ur vi ve d
a n a t t e m pt by B e r l us c oni t o br i ng dow n t he gove r nm e nt i n O c t obe r , j us t
be f or e t h e ol d r ogue l os t hi s pa r l i a m e nt a r y i m m uni t y f ol l ow i ng c onvi c t i on
on c ha r ge s of f r a ud. B e r l us c oni ’ s m ove ba c kf i r e d; i ns t e a d of br i ngi ng
dow n t h e gove r n m e nt , hi s ow n P dL pa r t y s pl i t , w i t h a f a c t i on of m ode r a t e s
s t i c ki ng w i t h L e t t a . B ut L e t t a t he n f a c e d a de a dl i e r c ha l l e nge f r om hi s ow n
s i de . T h e t ur bo- c ha r ge d f or m e r m a yor of F l or e nc e , M a t t e o R e nz i , t ook
ove r t he l e a de r s hi p of t he D e m o c r a t i c P a r t y i n D e c e m be r , a nd t he n pus he d
L e t t a out of pow e r i n F e br ua r y 2014.
L i ke M ont i , L e t t a ha d be e n pop ul a r w i t h M e r ke l pa r t l y be c a us e he w a s
not B e r l us c oni a nd pa r t l y be c a us e he unde r s t ood t he c a s e f o r s t r uc t ur a l
r e f or m s a t hom e . B ut M e r ke l w a s ne ve r c onf i de nt of s e e i ng m uc h i n t he
w a y of r a di c a l r e f or m f r om hi s ba ggy l e f t – r i ght c oa l i t i on. I t r e m a i ns t o be

s e e n w ha t s he w i l l m a ke of R e nz i . T hi s young a nd e ne r ge t i c ne w l e a de r i s
now w i d e l y s e e n bot h i ns i de a nd out s i de I t a l y a s t he l a s t gr e a t hope of hi s
c ount r y’ s r e f or m e r s . B ut hi s c oa l i t i on i s not m uc h s t r onge r t ha n L e t t a ’ s ,
a nd he i s vul ne r a bl e t o t he c ha r ge of be i ng ye t a not he r une l e c t e d l e a de r
i m pos e d on I t a l i a n vot e r s .
T ha t l e a ve s t he nor t he r n gr oup i n t he e ur o z one , m os t of w h i c h a r e
na t ur a l a l l i e s of G e r m a ny . A us t r i a , F i nl a nd a nd L uxe m bour g a r e t he onl y
ot he r A A A – r a t e d c ount r i e s t ha t he l p t o s us t a i n t he r a t i ng of e ur o- z one
r e s c ue f unds . B ut a l l a r e s m a l l . T he D ut c h a nd F i nns us ua l l y s uppor t
G e r m a n c a l l s f or a us t e r i t y . Y e t t he N e t he r l a nds w a s dow ngr a de d i n 2013 a s
t he D ut c h e c onom y s t r uggl e d t o ove r c om e t he a f t e r – e f f e c t s of a hous i ng
bus t . T he e a s t e r n ne w c om e r s t o t he e ur o, S l ova ki a , S l ove ni a , E s t oni a a nd
( f r om J a nua r y 2014) L a t vi a , a r e s m a l l c ount r i e s a s w e l l , a nd S l ove ni a ha s
hove r e d on t he br i nk of ne e di ng a ba i l – out f or i t s i nde b t e d ba nks .
H ow e ve r , t he s e t w o gr oups gi ve pow e r f ul s uppor t t o t he br o a d G e r m a n
na r r a t i ve , w hi c h i s t ha t t he c ur e f or t he e ur o c r i s i s i s t o be f ou nd i n f i s c a l
a us t e r i t y a nd s t r uc t ur a l r e f or m a t hom e . T he B a l t i c c ount r i e s , e s pe c i a l l y
L a t vi a , w e nt t hr ough a l m os t a s w r e nc hi ng a n a dj us t m e nt i n t he e a r l y 2000s
a s G r e e c e , a nd w i t hout pr ovoki ng r i ot s . T he y a r e a m ong t he s t r onge s t
a dvoc a t e s t ha t ot he r he a vi l y i nde bt e d c ount r i e s s houl d f ol l ow s ui t . L a t vi a ’ s
i s now t he f a s t e s t – gr ow i ng e c onom y i n t he E U .
W ha t t he e ur o c r i s i s ha s c l e a r l y done i s t o br e a k w ha t us e d t o be t he
E U ’ s e a s t –w e s t di vi s i on. M os t of t he c ount r i e s t ha t j oi ne d i n 2004, a nd
e ve n m or e s o B ul ga r i a a nd R om a ni a , w hi c h j oi ne d i n 2007, r e m a i n
s i gni f i c a nt l y po or e r t ha n t he ot he r s , but t he y a r e c a t c hi ng up a s t he y
be ne f i t f r om E U s t r uc t ur a l f unds . T he ne w e c onom i c a nd pol i t i c a l di vi s i on
i n E ur ope i s i nc r e a s i ngl y a nor t h–s out h one . T hi s i s pot e nt i a l l y t r oubl i ng
f or t he e nt i r e pr oj e c t . F or i t s f i r s t 50 ye a r s unt i l 2007, i t a l w a ys f unc t i one d
on t he ba s i s t ha t i t w a s br i ngi ng a bout c onve r ge nc e be t w e e n m e m be r
c ount r i e s . S i nc e t he e ur o c r i s i s hi t , t he pa t t e r n ha s be e n m or e one of
di ve r ge nc e . A nd t ha t c oul d e a s i l y s t i r up s t i l l m or e popul a r r e s e nt m e nt of
t he E U i n t he s out h.
G e r m a ny i s a l s o l ooki ng t o s om e non- e ur o c ount r i e s a s pot e nt i a l ne w
pa r t ne r s , e s pe c i a l l y P ol a nd a nd , t o a l e s s e r e xt e nt , S w e de n. I nde e d, w e r e
P ol a nd t o j oi n t he s i ngl e c ur r e nc y , i t i s not t oo f a nc i f ul t o s e e i t vyi ng w i t h
F r a nc e a nd t he U K a s G e r m a ny’ s m a i n a l l i e s ( F r e nc h s us pi c i o n of e a s t e r n

e nl a r ge m e nt w a s of t e n a t t r i but a bl e t o i t s w or r y a bout l os i n g i nf l ue nc e
w i t hi n t he c l ub t o G e r m a ny) . B i l a t e r a l G e r m a n–P ol i s h r e l a t i ons a r e
w a r m e r t ha n t he y ha ve be e n i n 500 ye a r s . M e r ke l r e s pe c t s D ona l d T us k,
t he P ol i s h pr i m e m i ni s t e r , s o m uc h t ha t s he br i e f l y t oye d w i t h put t i ng hi m
f or w a r d f or t he C om m i s s i on pr e s i de nc y . R a de k S i kor s ki , t he f or e i gn
m i ni s t e r , ha s be e n w i de l y t out e d a s a c a ndi da t e f or one of t he t op E U j obs ,
a t l e a s t s i nc e hi s not a bl e N ove m be r 2011 s pe e c h i n B e r l i n w he n he
a nnounc e d t ha t he w a s “ pr oba bl y t he f i r s t P ol i s h f or e i gn m i ni s t e r i n
hi s t or y t o s a y t hi s , but he r e i t i s : I f e a r G e r m a n pow e r l e s s t ha n I a m
be gi nni ng t o f e a r G e r m a n i na c t i vi t y” .9
T he i nc r e a s i ng i nf l ue nc e of P ol a nd doe s , how e ve r , t hr ow t he s pot l i ght
on t he r e m a i ni ng bi g di vi s i on i n t he E U , be s i de s a n e c onom i c nor t h- s out h
one . T hi s i s be t w e e n t he 18 e u r o- z one i ns a nd t he t e n out s . A s t he e ur o
z one pu r s ue s de e pe r pol i t i c a l i nt e gr a t i on, i nc l udi ng of f i s c a l pol i c y a nd
ba nki ng r e gul a t i on, a nd e ve n t oys w i t h s e t t i ng up i t s ow n s e pa r a t e
i ns t i t ut i ons , i t i s be c om i ng i nc r e a s i ngl y c l e a r t ha t t he s i ngl e c ur r e nc y i s
t he m os t i m por t a nt s ubgr oup i n t he br oa de r E ur ope a n c l ub. T ha t r a i s e s
huge da nge r s f or t he m a i nt e na nc e of t he w i de r s i ngl e m a r ke t a t 28, a nd
e s pe c i a l l y f or t he pos i t i on of t he m os t r e c a l c i t r a nt c ount r y of a l l : t he U K .

8 I n , o u t , s h a k e i t a l l a b o u t
UNTIL EUROPEAN ECONOMIC AND MONETARY UNION (EMU) c a m e a l ong w i t h
t he M a a s t r i c ht t r e a t y , t he ge ne r a l a s s um pt i on w a s t ha t a l l m e m be r s of t he
E ur ope a n c l ub w oul d pa r t i c i pa t e i n a l l i t s f or m a t i ons a nd pol i c i e s .
N a t ur a l l y t he r e w e r e e xc e pt i ons : I r e l a nd w a s ne ut r a l , s o w he n i t j oi ne d i n
1973 i t be c a m e t he onl y m e m be r not i n N A T O ; a nd t he U K a nd I r e l a nd
s t a ye d out of a t t e m pt s t o s e t up pa s s por t – f r e e t r a ve l t hr ough t he S c he nge n
t r e a t y . S om e i nne r c l ubs s uc h a s t he B e ne l ux t r i o a l s o e xi s t e d. B ut
M a a s t r i c ht m a r k e d t he f i r s t oc c a s i on w he n s om e E U c ount r i e s , i n t hi s c a s e
f i r s t t he U K a nd l a t e r D e nm a r k, s pe c i f i c a l l y opt e d out of a t r e a t y
obl i ga t i on t o j oi n a m a j or E ur o pe a n pr oj e c t , t he s i ngl e c ur r e nc y . A l s o i n
M a a s t r i c ht , t he U K opt e d out of t he s o- c a l l e d s oc i a l c ha pt e r of s oc i a l a nd
e m pl oym e nt l e gi s l a t i on. M or e ove r , t he t r e a t y c l e a r l y e nvi s a ge d t ha t not a l l
E ur ope a n U ni on m e m be r s w oul d qua l i f y f or E M U . T hus w a s bor n a ne w
c onc e pt f or t he E ur ope a n pr oj e c t : t ha t m os t w e r e i n but s om e w oul d s t a y
out of c e r t a i n pr oj e c t s .
T he ne w c om e r s t o t he E ur ope a n c l ub i n 1973, f ol l ow e d by G r e e c e i n
1981 a n d, t o a l e s s e r e xt e nt , S pa i n a nd P or t uga l i n 1986, ha d l o ng be e n a n
i r r i t a nt t o t he m or e f e r ve nt E ur ophi l e s f r om t he or i gi na l s i x, e s pe c i a l l y
t hos e w h o be l i e ve d t ha t t he y w e r e c om m i t t e d t o a pa t h t ha t w oul d l e a d t o a
f e de r a l U ni t e d S t a t e s of E ur op e . B y j oi ni ng t he t he n E E C , a l l c ount r i e s
a c c e pt e d t he goa l s e t out i n t he pr e a m bl e t o t he T r e a t y of R om e , of a n
“ e ve r c l os e r uni on” . B ut , e xc e p t f or I r e l a nd a nd, l a t e r , S pa i n a nd P or t uga l ,
a l l o f t h e m w e r e m or e or l e s s une nt hus i a s t i c a bout t hi s obj e c t i ve . T he U K
e s pe c i a l l y c a m e t o be s e e n, not a bl y dur i ng t he ye a r s of M a r ga r e t T ha t c he r ,

a s a ba c ks l i de r i n E ur ope a nd a n i nc r e a s i ngl y E ur os c e pt i c c ount r y . T ha t
be c a m e e ve n m or e ob vi ous dur i ng t he pa i nf ul l y pr ot r a c t e d pr oc e s s of
r a t i f i c a t i on of t he M a a s t r i c ht t r e a t y by t he B r i t i s h P a r l i a m e nt i n t he ye a r s
of t he J ohn M a j or gove r nm e nt be t w e e n 1992 a nd 1994.
T hi s pe r c e pt i on, c om bi ne d w i t h t he s i m pl e f a c t of t he E ur ope a n U ni on
t he n c om pr i s i ng 12 r a t he r t ha n s i x m e m be r s ( s oon t o be c om e 15, a f t e r t he
a c c e s s i on of A us t r i a , F i nl a nd a nd S w e de n i n 1995) , l e d s om e t o ponde r t he
m e r i t s o f a E ur ope t ha t w oul d m ove a t di f f e r e nt s pe e ds or e v e n t ow a r ds
di f f e r e nt de s t i na t i ons . T he i de a t ha t a s m a l l gr oup of c ount r i e s m i ght go
f a s t e r t ha n ot he r s ha d be e n f l oa t e d a s f a r ba c k a s t he 1970s by L e o
T i nde m a ns , t he n B e l gi a n pr i m e m i ni s t e r , but w i t hout f i ndi ng f a vour .1 I n
1994 t w o l e a di ng G e r m a n C hr i s t i a n D e m oc r a t s , W ol f ga ng S c hä ubl e ( w ho
be c a m e t he G e r m a n f i na nc e m i ni s t e r i n 2009) a nd K a r l L a m e r s , publ i s he d
a pa pe r i n w hi c h t he y r e vi ve d t he not i on by s ugge s t i ng t ha t , r a t he r t ha n
a l w a ys be i ng f or c e d t o go a t t he pa c e of t he s l ow e s t , a “ ha r d c or e ” of
c ount r i e s m i ght m ove a he a d w i t h de e pe r i nt e gr a t i on, l e t t i ng t he
ba c km a r ke r s c a t c h up l a t e r ( or pe r ha ps not a t a l l ) .2
T he c on c e pt w a s t a ke n a s t a ge f ur t he r i n t he 1997 A m s t e r da m t r e a t y .
D e nm a r k, I r e l a nd a nd t he U K i ns i s t e d on t he r i ght t o opt ou t of f ut ur e
j us t i c e a nd hom e a f f a i r s l a w s i f t he y w a nt e d t o. A nd a ne w t r e a t y pr ovi s i on
w a s a pp r ove d t h a t s pe c i f i c a l l y pr ovi de d f or t he pos s i bi l i t y of “ e nha nc e d
c o- ope r a t i on” , m e a ni ng t ha t a s ubs e t of E U m e m be r s c oul d go a he a d w i t h
s t e ps t o w a r ds gr e a t e r i nt e gr a t i o n w i t hout ha vi ng t o w a i t f or a l l t o a gr e e .
B y t hi s t i m e t he not i on ha d a c qui r e d m a ny di f f e r e nt l a be l s . B e s i de s ha r d
c or e s a nd e nha nc e d c o- ope r a t i on, t he s e i nc l ude d va r i a bl e ge om e t r y , a va nt –
ga r de , p i one e r gr oups , f l e xi bi l i t y , c onc e nt r i c c i r c l e s , m ul t i – s pe e d, t w o-
s pe e d, m ul t i – t i e r , t w o- t i e r . T he e xa c t l a be l us e d of t e n de pe nde d on i t s
us e r ’ s vi e w s : i nt e gr a t i oni s t s t e nde d t o pr e f e r l a ngua ge t ha t i m pl i e d
di f f e r e nt c l a s s e s or s pe e ds of E U m e m be r s hi p, w he r e a s t he B r i t i s h ( a nd
D a ne s ) ge ne r a l l y pr e f e r r e d w or di ng t ha t s i m pl y c onnot e d va r i a t i ons i n t he
t e r m s of a c ount r y’ s m e m be r s hi p.
F or m os t a r e a s of E U pol i c y , h a vi ng s om e c ount r i e s i n but ot he r s out
c a n be s e e n a s a de t a i l , pe r ha p s a s l i ght a nnoya nc e , but not ot he r w i s e a
huge i s s ue . T he r e a r e f e w r e a l c onc e r ns i n E ur ope ove r t he U K a nd I r e l a nd
i ns i s t i ng, a s i s l a nds t ha t l a c k c o m pul s or y i de nt i t y c a r ds , t ha t t he y w a nt t o

s t a y out of t he S c he nge n pa s s p or t – f r e e z one , w hi c h a nyw a y i nc l ude s s uc h
non- E U c ount r i e s a s N or w a y a nd S w i t z e r l a nd. S i m i l a r l y , nobody w or r i e s
m uc h t ha t D e nm a r k doe s not pa r t i c i pa t e i n m os t E U m i l i t a r y or de f e nc e –
r e l a t e d a c t i vi t i e s . T he A m s t e r d a m pr ovi s i ons f or e nha nc e d c o- ope r a t i on
t he m s e l ve s ha ve be e n us e d onl y t w i c e , f or a m e a s ur e on di vor c e a nd f or
t he E U pa t e nt ( w hi c h I t a l y a nd S pa i n r e f us e d t o j oi n on l i ngui s t i c
gr ounds ) , w i t hout ups e t t i ng t he e nt i r e s ys t e m .
E M U i s , how e ve r , m or e s e r i ous , m a i nl y be c a us e i t s o s t r ongl y a f f e c t s
ot he r E ur ope a n pol i c i e s . O f c ou r s e i t w a s a l w a ys goi ng t o be a c l ub w i t hi n
a c l u b, s i nc e t he M a a s t r i c ht c r i t e r i a w e r e de s i gne d f r om t he s t a r t t o r e s t r i c t
m e m be r s hi p of t he s i ngl e c ur r e n c y t o t hos e t ha t qua l i f i e d. G r e e c e f a i l e d i n
1998, f or e xa m pl e , t hough a s t he C om m i s s i on s a i d i n i t s opi ni on on t he
m a t t e r i t a r gua bl y s t i l l f a i l e d m os t of t he c r i t e r i a w he n i t j oi ne d i n 2001.
B ut s om e c ount r i e s t ha t c oul d ha ve s i gne d up f or s t a ge t hr e e of E M U
( a dopt i ng t he s i ngl e c ur r e nc y) de l i be r a t e l y c hos e not t o. T he U K a nd
D e nm a r k ha d t r e a t y opt – out s . A l t hough T ony B l a i r s e e m e d f or a t i m e
hope f ul of j oi ni ng a f t e r he be c a m e pr i m e m i ni s t e r i n 1997, hi s c ha nc e l l or
of t he e xc he que r , G or don B r ow n, w a s a ga i ns t . T he “ f i ve t e s t s ” t ha t B r ow n
de vi s e d f or m e m be r s hi p ( on bus i ne s s c yc l e s , f l e xi bi l i t y , i nve s t m e nt ,
f i na nc i a l s e r vi c e s a nd gr ow t h) m a y ha ve be e n m or e s e ns i bl e t ha n t he
M a a s t r i c ht c r i t e r i a , but t he y a l s o pr ove d i m pos s i bl e t o pa s s . D e nm a r k put
t he m a t t e r t o a r e f e r e ndum i n S e pt e m be r 2000, w hi c h r e t ur ne d a ne ga t i ve
m a j or i t y . S w e de n, w hi c h w a s l e ga l l y obl i ge d t o j oi n by t he t e r m s of i t s
a c c e s s i on t r e a t y , c hos e a l s o t o p ut t he i s s ue t o i t s pe opl e , w ho vot e d no i n
S e pt e m be r 2003 . T hus t he e ur o be ga n l i f e w i t h t hr e e “ vol u nt a r y” non-
m e m be r s f r om t he E U .
A l l c ount r i e s t ha t a c c e de t o t he E ur ope a n U ni on a r e now l e ga l l y
r e qui r e d by t he i r a c c e s s i on t r e a t i e s a l s o t o j oi n t he e ur o ( s om e t hi ng t ha t
w oul d a ppl y , i nc i de nt a l l y , t o a n i nde pe nde nt S c ot l a nd) . B ut t he y ha ve t o
t a ke t he s t e p onl y w he n t he y a r e r e a dy a nd w he n t he y m e e t t he M a a s t r i c ht
c r i t e r i a . I n pr a c t i c e , t hi s ha s m e a nt t ha t no c ount r y c a n be f or c e d i nt o t he
e ur o i f i t c hoos e s not t o a dopt i t . M or e ove r , t he pr oc e s s w a s a l w a ys goi ng
t o t a ke s om e t i m e f or t he m a i nl y c e nt r a l a nd e a s t e r n E ur ope a n c ount r i e s
t ha t j oi ne d t he E U i n 2004 a nd 2007. S l ove ni a w a s t he f i r s t ne w e nt r a nt t o
j oi n t he e ur o, i n 2007. I t ha s s i nc e be e n f ol l ow e d by C ypr us a nd M a l t a
( 2008) , S l ova ki a ( 2009) , E s t oni a ( 2011) a nd L a t vi a ( 2014) . T hi s m e a ns

t ha t 18 of t he E u r ope a n U ni on’ s 28 m e m be r c ount r i e s a r e a l s o m e m be r s of
t he e ur o, w hi l e t e n r e m a i n, a t l e a s t f or now , out s i de t he s i ngl e c ur r e nc y .3
W h e n i n t r u m p s o u t
T hi s di vi s i on i nt o i ns a nd out s i s , of c our s e , s om e w ha t bl ur r e d a nd f l ui d.
B e c a us e i t s ha dow s t he e ur o a nd t he E C B s o c l os e l y , D e nm a r k a l r e a dy
f unc t i ons a s i f i t i s i n, t hough i t w oul d ne e d a not he r r e f e r e ndum be f or e i t
c oul d a c t ua l l y j oi n – a nd t ha t s e e m s unl i ke l y f or now . B ut m os t of t he
“ out s ” a r e , i n e f f e c t , “ pr e – i ns ” . L i t hua ni a w i l l c l e a r l y f ol l ow t h e ot he r t w o
B a l t i c r e publ i c s i nt o t he e ur o a s s oon a s i t c a n, pr oba bl y i n 2015. P ol a nd
w i l l t a ke qui t e a l ot l onge r , but i t s i nt e nt i on t o j oi n a t s om e poi nt i s c l e a r .
B ul ga r i a , R om a ni a a nd C r oa t i a m a y w e l l ne e d a l ong pe r i od be f or e t he y
a r e d e e m e d r e a dy t o t a ke on t he e ur o’ s obl i ga t i ons . O f t he r e c e nt e nt r a nt s ,
onl y t he C z e c h R e publ i c a nd pe r ha ps H unga r y s e e m t o be uns ur e i n
pr i nc i pl e w he t he r t o j oi n t he e ur o, put t i ng t he m c l os e r t o t he s a m e c a m p a s
S w e de n a nd t he U K .
W hy doe s a ny of t hi s m a t t e r ? T he r e a r e t hr e e br oa d a ns w e r s . T he f i r s t
i s t ha t , a s t he e ur o c r i s i s ha s pus he d i t s m e m be r s t ow a r ds de e pe r
i nt e gr a t i on, s o i t ha s i ne xor a bl y s t a r t e d t o m a ke m e m be r s hi p o f t he s i ngl e
c ur r e nc y m or e i m por t a nt t ha n a ny ot he r a s pe c t of t he E ur ope a n U ni on. A s
not e d i n pr e vi ou s c ha pt e r s , i n t he f our ye a r s t o 2014 t he t a s k of s a vi ng t he
e ur o ha s be e n o ve r w he l m i ngl y t he m a i n E ur ope a n bus i ne s s f or G e r m a ny’ s
A nge l a M e r ke l , a s f or ot he r e u r o- z one l e a de r s . S i m i l a r l y , t he pr e s s ur e on
ba i l e d- out c ount r i e s t o c om pl y w i t h c r e di t or s ’ de m a nds f or f i s c a l
r e t r e nc hm e nt a nd s t r uc t ur a l r e f or m s ha s ove r w he l m e d a ny ot he r E U
a c t i ons a nd pol i c i e s . A l t hough t he t w o a r e i n pr a c t i c e of t e n c onf l a t e d, t o
c i t i z e ns of G r e e c e or P or t uga l i t i s t he e ur o a nd not t he E U t ha t i s s e e n t o
ha ve m a de t he i r l i ve s a m i s e r y . Y e t i t i s t he E U , not t he s i ng l e c ur r e nc y ,
a ga i ns t w hi c h t he y t e nd t o f ul m i na t e m os t l oudl y ( opi ni on pol l s i n m os t
c ount r i e s c ont i nue t o f i nd m a j or i t i e s f or s t a yi ng i n t he e ur o) .
S e c ond, i ns t i t ut i ona l a nd ot he r c ha nge s a dopt e d by a nd f or t he e ur o c a n
ha ve a di r e c t i m pa c t on t he s t r uc t ur e of t he w i de r c l ub, s om e t i m e s t o t he
l a t t e r ’ s d i s a dva nt a ge . T he e m e r g e nc e of t he E ur ogr oup, w hi c h w a s f i e r c e l y
r e s i s t e d by m os t of t he out s , e s pe c i a l l y t he U K , ha s c l e a r l y r e duc e d t he
s i gni f i c a nc e of E c oF i n m e e t i n gs of f i na nc e m i ni s t e r s , j us t a s t he out s

pr e di c t e d. N ow e ur o s um m i t s t hr e a t e n t o do t he s a m e t o E ur ope a n
C ounc i l s , one r e a s on w hy D ona l d T us k, t he P ol i s h pr i m e m i ni s t e r , gr e e t e d
t he i r e s t a bl i s hm e nt w i t h bi t t e r w or ds , a ddr e s s e d t o M e r ke l , “ A r e w e
ge t t i ng i n your w a y? Y ou a r e h um i l i a t i ng us .” O t he r i ns t i t ut i o na l c ha nge s
ove r r e c e nt ye a r s , i nc l udi ng t he s e t t i ng- up of t he e ur o z one ’ s va r i ous ba i l –
out f unds , t he f i s c a l c om pa c t t r e a t y a nd t he ba nki ng uni on, u nde r w hi c h
ba nk s upe r vi s i o n f or e ur o- z one c ount r i e s i s m ovi ng t o t he E C B , w i l l not
a ppl y t o s e ve r a l c ount r i e s not i n t he e ur o. F ut ur e i de a s c oul d go e ve n
f ur t he r : a e ur o- z one budge t or i ns ur a nc e f und, or a s e pa r a t e e ur o- z one
C om m i s s i on a nd P a r l i a m e nt , w oul d c l e a r l y dow ngr a de t he r ol e a nd
s i gni f i c a nc e of t he i r w i de r E U e qui va l e nt s .
T hi r d, a nd r e l a t e d t o t hi s , t he e ur o a nd t he pol i c i e s a dopt e d f o r i t c a n
a f f e c t p ol i c i e s t ha t t ouc h on a l l E U c ount r i e s , i nc l udi ng out s . T he m os t
obvi ous r i s k i s t ha t de c i s i ons t a ke n by t he e ur o z one on i s s ue s l i ke t a xa t i on
c oul d s pi l l i nt o or e ve n da m a ge t he w i de r s i ngl e m a r ke t . U nde r t he
pr ovi s i ons of t he L i s bon t r e a t y , f r om 2015 onw a r ds t he 18 e ur o- z one
c ount r i e s w i l l c ons t i t ut e a “ qua l i f i e d m a j or i t y” i n t he m s e l ve s . T hi s m e a ns
t ha t i f t he y w e r e t o f or m a c a uc us be f or e m e e t i ngs of t he f ul l 28- m e m be r
C ounc i l of M i ni s t e r s , t he y c oul d, i n e f f e c t , t a ke a de c i s i on t ha t w oul d t he n
w i l l y- ni l l y be i m pos e d on t he r e s t . I n r e c ogni t i on of t hi s , t he U K i ns i s t e d
t ha t i n t he E u r ope a n B a nki ng A ut hor i t y , w hi c h i s ba s e d i n L ondon,
de c i s i ons s houl d be t a ke n by a “ doubl e m a j or i t y” s ys t e m t ha t pr ot e c t s t he
pos i t i on of out s by r e qui r i ng m e a s ur e s t o ha ve m a j or i t y s uppor t of bot h
gr oups – t hough a s m or e out s j oi n t he e ur o, t hi s s ys t e m w i l l l os e m uc h of
i t s p ot e nc y a nd i t w i l l s t op w or ki ng a l t oge t he r w he n f e w e r t ha n f our
c ount r i e s a r e out .
A c oupl e of c ons i de r a t i ons m a ke t he s e t hr e e poi nt s m or e w or r yi ng f or
t he f ut ur e . T he f i r s t i s t ha t t he r e i s a s ubt l e i de ol ogi c a l di f f e r e n c e be t w e e n
t he 18 i ns a nd t he t e n out s . T he f i r s t gr oup ha s a s l i ght l y m or e
pr ot e c t i oni s t , a nt i – f r e e m a r ke t be nt , l a r ge l y be c a us e i t c ount s t he
M e di t e r r a ne a n c ount r i e s a nd F r a nc e a m ong i t s m os t i m por t a nt m e m be r s .
B y c ont r a s t , t he out s i nc l ude a l m os t a l l of t he E U ’ s m os t l i be r a l f r e e
t r a de r s , i nc l udi n g t he U K , D e nm a r k a nd S w e de n f r om ol de r m e m be r s a nd
P ol a nd a nd t he C z e c h R e publ i c f r om ne w e r one s . M e r ke l f or one i s f ul l y
a w a r e o f t hi s , w hi c h i s w hy s he ha s a l w a ys r e m a i ne d ke e n t o pr e s e r ve
s i ngl e – m a r ke t p ol i c y de c i s i ons f or t he f ul l 28, not t he na r r ow e r 18, a gr oup

i n w hi c h s he ha s f e w e r na t ur a l a l l i e s .4 T he s e c ond c on s i de r a t i on i s t ha t t he
di vi de be t w e e n i ns a nd out s i s l i ke l y t o pe r s i s t f or s om e t i m e , a nd
c onc e i va bl y f or e ve r . W he n a ny of t he out s ha ve r a i s e d c onc e r ns a bout
be i ng di s a dva nt a ge d by t he i r s t a t us , one e a s y r e s pons e ha s a l w a ys be e n t o
poi nt t o a s i m pl e s ol ut i on t o t he i r w or r i e s : t he y s houl d j oi n t he e ur o. A nd
i nde e d, a s a l r e a dy not e d, m a ny of t he out s a r e pr e – i ns t ha t a r e pl a nni ng t o
do j us t t ha t . B ut t he e ur o c r i s i s ha s m a de s e ve r a l c ount r i e s e xt r e m e l y
ne r vous a bout pl ungi ng i n t oo s oon. I t ha s a l s o l e d t he i ns t o be m or e
c a r e f ul a bout w hom t he y a dm i t – m a ny now be l i e ve t ha t i t w a s a m i s t a ke
t o l e t i n G r e e c e , f or e xa m pl e . S om e of t he out s , i nc l udi ng S w e de n a nd
D e nm a r k, m us t a l s o w i n r e f e r e ndum s be f or e t he y c a n j oi n. A bove a l l ,
t he r e i s one out , i nde e d t he bi g ge s t of t he m a l l , t ha t i s hi ghl y unl i ke l y t o
j oi n t he e ur o f or t he f or e s e e a bl e f ut ur e , i f e ve r : t he U K .
T h o s e p e s k y B r i t s
I t m a y s e e m odd f or a book l ooki ng m a i nl y a t t he c a us e s a nd c ons e que nc e s
of t h e e ur o c r i s i s t o de vot e m uc h s pa c e t o a c ount r y t ha t ha s no i nt e nt i on
of a d opt i ng i t . B ut t he i l l s of t he s i ngl e c ur r e nc y a nd how t he y a r e r e s ol ve d
c oul d ha ve a pr of ound e f f e c t on t he U K de ba t e a bout w he t he r t o s t a y i n t he
c l ub. A nd t ha t de ba t e i n t ur n w i l l a f f e c t t he e ur o z one , f or i t i s ha r d t o s e e
e i t he r i t or t he w i de r E U goi ng a he a d una f f e c t e d i f a huf f y U K w e r e t o
pi c k up i t s t oys a nd w a l k out , w hi c h ha s be c om e a di s t i nc t pos s i bi l i t y .
T he U K ha s a l w a ys be e n t he m os t a w kw a r d m e m be r of t he E ur ope a n
c l ub. T hi s goe s ba c k a t l e a s t a s f a r a s C hur c hi l l ’ s 1946 Z ur i c h s pe e c h,
w he n he c a l l e d f or a m or e pol i t i c a l l y i nt e gr a t e d E ur ope but m a de c l e a r
t ha t t he U K w oul d not be pa r t of i t , a s w e l l a s t o t he de t a c hm e nt of t he
B r i t i s h r e pr e s e nt a t i ve a t t he 1956 M e s s i na c onf e r e nc e . I t w a s o nl y i n 1961
t ha t t he B r i t i s h gove r nm e nt de c i de d i t s houl d ge t m or e i nvol ve d, but by
t he n F r a nc e w a s l e d by de G a ul l e , w ho i m pl a c a bl y ( i f , pe r ha ps ,
unde r s t a nda bl y , on t he gr ounds t ha t t he U K ha d i nt e r e s t s t ha t w e r e m or e
A t l a nt i c i s t t ha n c ont i ne nt a l ) t w i c e ve t oe d B r i t i s h e nt r y – t o t he c ha gr i n of
t he ot he r f i ve m e m be r s .
E ve n a f t e r E dw a r d H e a t h t r i um pha nt l y t ook t he U K i nt o t he E E C i n
1973, i t s r e put a t i on a s a r e l uc t a nt m e m be r e ndur e d. H i s L a bour oppone nt ,
H a r ol d W i l s on, ha d oppos e d t he e nt r y t e r m s a nd, w he n he w on e l e c t i on i n

1974, s e t a bout w ha t he c a l l e d a “ r e ne got i a t i on” , l a r ge l y a s a pol i t i c a l
ge s t ur e m e a nt t o a ppe a s e hi s p a r t y’ s f i e r c e s t a nt i – m a r ke t e e r s ( a t a l e t ha t
m a y s ou nd f a m i l i a r t o obs e r ve r s of t he B r i t i s h C ons e r va t i ve P a r t y 40 ye a r s
on) . H e kne w t ha t he c oul d n ot pus h t he i de a t oo f a r , how e ve r , s o he
s t oppe d s hor t of c a l l i ng f or f ur t he r t r e a t y c ha nge s a nd s e t t l e d f or m os t l y
c os m e t i c m e a s u r e s t ha t w e r e e nough t o s e c ur e a n ove r w he l m i ng ye s vot e
f or c ont i nui ng m e m be r s hi p i n a r e f e r e ndum he l d i n J une 1975.
T hi s by no m e a ns e nde d B r i t i s h gr um pi ne s s , how e ve r . A f t e r i t l os t t he
1979 e l e c t i on, t he L a bour P a r t y m ove d i nt o a s t r ong a nt i – E ur ope a n
pos i t i on. U nde r t he l e a de r s hi p o f M i c ha e l F oot f r om 1980, i t c a m pa i gne d
f or ( a nd l os t ) t he 1983 e l e c t i on on a m a ni f e s t o pr om i s i ng i m m e di a t e
w i t hdr a w a l f r om t he E E C . B ut E ur ope a ns di d not f i nd t he nom i na l l y pr o-
E ur ope a n T or y gove r nm e nt e l e c t e d i n 1979 a n e a s y pa r t ne r , e i t he r .
M a r ga r e t T ha t c he r be ga n he r t i m e a s pr i m e m i ni s t e r by de m a ndi ng he r
m one y ba c k f r om t he E ur ope a n budge t a nd e nde d i t 11 ye a r s l a t e r by
c r yi ng “ no, no, no” t o s ugge s t i ons t ha t t he E ur ope a n pr oj e c t m i ght e vol ve
t ow a r ds a c l os e r f e de r a l uni on, w i t h t he C om m i s s i on a c t i ng a s a
gove r nm e nt , t he P a r l i a m e nt a s a l ow e r c ha m be r a nd t he C ounc i l of
M i ni s t e r s a s a n uppe r hous e – a n i nc i de nt t ha t c ont r i but e d di r e c t l y t o t he
r e be l l i on w i t hi n t he pa r t y w hi c h l e d t o he r r e m ova l f r om of f i c e .
S o i t ha s be e n w i t h t he U K a n d t he s i ngl e c ur r e nc y , a l m os t f r om i t s
be gi nni ngs , a nd t o a n e xt e nt s o i t i s t oda y . F r om t he or i gi na l opt – out a t
M a a s t r i c ht , w hi c h J ohn M a j or , T ha t c he r ’ s s uc c e s s or , s e c ur e d, unt i l t he
e s t a bl i s hm e nt o f t he e ur o i n 1999, t he B r i t i s h gove r nm e nt a nd publ i c ha ve
r e m a i ne d de e pl y dubi ous a bout bot h t he w i s dom of s e t t i ng i t up a nd i t s
pr os pe c t s of s ur vi va l . I nde e d , i n 1994 M a j or hi m s e l f e xpr e s s e d hi s
s c e pt i c i s m a bou t t he c ha nc e s of t he s i ngl e c ur r e nc y e ve r c om i ng i nt o
be i ng: w r i t i ng i n T he E c onom i s t , h e t a l ke d of t hos e w ho c ont i nue d t o
r e c i t e t he m a nt r a of f ul l E M U a s ha vi ng “ a l l t he qua i nt ne s s of a r a i n da nc e
a nd a bout t he s a m e pot e nc y” .5 W he n t he e ur o dul y a r r i ve d f i ve ye a r s l a t e r ,
m a ny B r i t ons w e r e s ur pr i s e d – a nd t he y w e r e e ve n m or e a s t oni s he d w he n
i t s ur vi ve d i t s f i r s t t e n ye a r s .
A ga i ns t t hi s ba c kgr ound, i t w a s t o be e xpe c t e d t ha t m os t B r i t i s h
obs e r ve r s , a nd e ve n m a ny B r i t i s h pol i t i c i a ns , r e a c t e d di f f e r e nt l y f r om t he
r e s t of E ur ope t o t he e r upt i on of t he e ur o c r i s i s i n 2009. W i t h a s t r ong

f e e l i ng of “ I t ol d you s o” , m a ny a ppe a r e d a t f i r s t t o w e l c om e t he s i ngl e
c ur r e nc y’ s t r a va i l s a nd t o f or e c a s t i t s e a r l y de m i s e . S i nc e t he U K ha d l ong
w a r ne d a ga i ns t t he f ol l y of t he e ur o, i t c hos e – unl i ke , s a y , P ol a nd a nd
S w e de n – t o d i s t a nc e i t s e l f f r om m os t r e s c ue pa c ka ge s f or i ndi vi dua l
c ount r i e s ( s a ve t ha t f or I r e l a nd, w i t h w hi c h t he U K ha s obvi ous s t r ong
l i nks ) a s w e l l a s t o s t a nd a s i de f r om a ny i ns t i t ut i ona l or t r e a t y- ba s e d
r e s pons e . T ha t t he e ur o c r i s i s c oi nc i de d w i t h t he a r r i va l of a ne w T or y-
L i be r a l c oa l i t i on l e d by D a vi d C a m e r on i n M a y 2010 m a de t he B r i t i s h
pos i t i on e ve n t oughe r , f or s i nc e t he m i d- 1990s t he C ons e r va t i ve s ha ve
t a ke n ov e r f r om L a bour a s t he m a i ns t r e a m pa r t y t ha t m os t l o ve s t o ha t e
E ur ope .
I nde e d, C a m e r on ha s be e n unde r pr e s s ur e f r om hi s E ur os c e pt i c
ba c kbe nc he r s t o do s om e t hi ng on E ur ope e ve r s i nc e he be c a m e pr i m e
m i ni s t e r . A s a c a ndi da t e f or t he pa r t y l e a de r s hi p i n 2005, he ha d pr om i s e d
t o pul l out of t he E ur ope a n P e opl e ’ s P a r t y , t he m a i n t r a ns na t i ona l c e nt r e –
r i ght pol i t i c a l gr oup, a nd di d s o i n 2009, a nnoyi ng M e r ke l i n pa r t i c ul a r , a s
w e l l a s w e a ke ni ng bot h hi s a nd hi s c ount r y’ s i nf l ue nc e i n t he E U . H e a l s o
pr om i s e d t o put t he ne w L i s bon t r e a t y t o a r e f e r e ndum , but l a t e r
a ba ndone d t ha t pl e dge be c a us e t he t r e a t y ha d be e n r a t i f i e d by t he t i m e he
t ook of f i c e . I ns t e a d he pa s s e d t h e E ur ope a n U ni on A c t , w hi c h r e qui r e s t ha t
a ny f ur t he r E U t r e a t y t ha t t r a ns f e r s s i gni f i c a nt pow e r s t o B r us s e l s m us t be
a ppr ove d by a na t i ona l r e f e r e ndum .
T he C a m e r on gove r nm e nt a l s o t ook a di f f e r e nt a t t i t ude f r om i t s
L a bour pr e de c e s s or t ow a r ds e f f or t s t o r e s ol ve t he e ur o c r i s i s . A l t hough i t
s t uc k f i r m l y t o t he pr i nc i pl e t ha t i t w a s , e s s e nt i a l l y , none of t he U K ’ s
bus i ne s s a nd t hus not f or t he U K t o j oi n i n he l pi ng t o s ol ve , i t qui c kl y
gr a s pe d t ha t a m e l t dow n of t he e ur o w oul d be hi ghl y da m a gi ng t o t he
B r i t i s h a s w e l l a s t o t he E ur ope a n e c onom i e s . S o f r om qui t e a n e a r l y s t a ge
C a m e r on a nd hi s c ha nc e l l or of t he e xc he que r , G e or ge O s bor ne , ur ge d t he
e ur o z one t o t a ke w ha t e ve r s t e ps w e r e ne c e s s a r y t o r e s ol ve t he c r i s i s ,
i nc l udi ng pus hi ng f or de e pe r pol i t i c a l a nd f i s c a l i nt e gr a t i on f r om w hi c h
t he U K w oul d s t a nd a s i de . T hi s w a s a bi g c ha nge f r om t r a di t i ona l B r i t i s h
pol i c y , w hi c h ha d a l w a ys be e n t o r e m a i n a s c l os e l y i nvol ve d a s pos s i bl e i n
a l l E U a nd e ur o – z one a c t i ons , of t e n i n t he hope of s l ow i ng t he m dow n a s
m uc h a s pos s i bl e .

T hi s w a s s t i l l , how e ve r , not e nough f or C a m e r on’ s E ur os c e pt i c
ba c kbe nc he r s . F r i ght e ne d a l s o by t he gr ow i ng a ppe a l of N i ge l F a r a ge ’ s U K
I nde pe nde nc e P a r t y ( U K I P ) , w hi c h s t ood e xpl i c i t l y f or w i t hdr a w a l f r om
t he E ur ope a n U ni on, t he y s t i l l c r a ve d s om e ki nd of c onf r ont a t i on. T he y
w e r e gr a nt e d t he i r w i s h i n D e c e m be r 2011 w he n t he E ur ope a n C ounc i l
w i s he d t o a dopt t he f i s c a l c om pa c t , a t r e a t y c e m e nt i ng ne w r ul e s on f i s c a l
pol i c y a nd a l s o r e qui r i ng na t i o na l gove r nm e nt s t o i ns e r t “ de bt br a ke s ”
l i m i t i ng budge t de f i c i t s i nt o t he i r c ons t i t ut i ons . C a m e r on c a m e t o B r us s e l s
t hr e a t e ni ng t o ve t o t hi s t r e a t y unl e s s he w a s gi ve n a s s ur a nc e s pr ot e c t i ng
t he C i t y of L on don f r om pos s i bl e f ut ur e c ha nge s i n f i na nc i a l r e gul a t i ons .
Y e t w he n he t a bl e d hi s s ugge s t i ons , t he ot he r gove r nm e nt s i gnor e d hi s
r e que s t a nd s i m pl y a dopt e d t he f i s c a l c om pa c t a s a n i nt e r – gove r nm e nt a l
t r e a t y out s i de t he nor m a l E U f r a m e w or k. N or di d C a m e r on w i n m uc h
s uppor t i n hi s r e f us a l t o s i gn up : ul t i m a t e l y 25 c ount r i e s r a t i f i e d t he f i s c a l
c om pa c t , i nc l udi ng e i ght non- e ur o m e m be r s , l e a vi ng onl y t he U K a nd t he
C z e c h R e publ i c a s non- s i gna t or i e s ( a l t hough t he C z e c hs now pl a n t o s i gn
t oo) .
E ve n t ha t w a s n ot t he e nd of C a m e r on’ s E ur ope a n a dve nt ur e s . H e t ook
t he ha r d e s t pos s i bl e l i ne on ne got i a t i ons ove r t he 2014–20 E U budge t t ha t
w e nt by t he un l ove l y na m e of t he “ m ul t i a nnua l f i na nc i a l f r a m e w or k” .
R a t he r t ha n r e o pe ni ng t he que s t i on of w ha t t he E U budge t w a s f or a nd
w he t he r i t c oul d be s pe nt m or e e f f i c a c i ous l y , a goa l t ha t m i ght ha ve be e n
e a s i e r t o a c hi e ve ha d he be e n w i l l i ng t o gi ve up s om e of t he U K r e ba t e , he
s e t hi m s e l f t he publ i c goa l of s i m pl y c ut t i ng t he budge t i n r e a l t e r m s . W i t h
s uppor t f r om M e r ke l , he e ve nt u a l l y got hi s w a y , but a t t he pr i c e not j us t of
pr e s e r vi ng f a r m s pe ndi ng br oa dl y i nt a c t but a l s o a nnoyi n g bot h t he
E ur ope a n P a r l i a m e nt a nd pot e nt i a l c e nt r a l E ur ope a n a l l i e s l i ke P ol a nd.
T he budge t w r a ngl e di d l i t t l e t o i m pr ove t he m ood of E ur os c e pt i c s i n
t he T or y pa r t y . T he y s t i l l w a n t e d s om e c om m i t m e nt t o r e ne got i a t e t he
U K ’ s m e m be r s hi p a nd pr om i s e vot e r s a n i n/ out r e f e r e ndum . C a m e r on
f e nde d o f f t he pr e s s ur e f or a s l o ng a s he c oul d, but e ve nt ua l l y he f e l t t ha t
he h a d t o s e t out hi s pl a ns . I n hi s s o- c a l l e d B l oom be r g s pe e c h i n J a nua r y
2013 ( gi ve n i n L ondon a f t e r r e pe a t e d f a i l e d e f f or t s t o f i nd a s ui t a bl e
c ont i ne nt a l l oc a t i on) , he c a l l e d f or s ubs t a nt i a l r e f or m s t o t he E U ,
i nc l udi ng l e s s r e gul a t i on, a c om pl e t i on of t he s i ngl e m a r ke t , a m or e
gr ow t h- e nha nc i ng a ge nda a nd a s t r e a m l i ne d bur e a uc r a c y . H e r e j e c t e d t he

i de a t ha t t he U K m i ght a dopt t he N or w e gi a n or S w i s s opt i ons of be i ng
out s i de t he E U b ut s ubj e c t t o m os t of i t s r ul e s . H e s ugge s t e d a bi gge r r ol e
f or na t i ona l pa r l i a m e nt s a nd s o m e ( uns pe c i f i e d) pa s s i ng of pow e r s ba c k
f r om E ur ope a n t o na t i ona l l e ve l . A l t hough he c a r e f ul l y a voi de d s pe c i f i c
B r i t i s h de m a nd s , he a nnounc e d t he e s t a bl i s hm e nt of a ne w a udi t of E U
c om pe t e nc e s t o s e e w he t he r a nd w he r e pol i c y a r e a s ha d s t r e t c he d t oo
m uc h ( t hus f a r i t ha s f ound r e m a r ka bl y f e w c a s e s ) . A nd he a dde d t ha t a t
t he ne xt e l e c t i on hi s pa r t y w oul d c a m pa i gn f or t he s e r e f or m s t o be m a de
by 2017 a nd, on t he ba s i s of a r e f or m e d E U , put t he i s s ue of t he U K ’ s
c ont i nui ng m e m be r s hi p t o a r e f e r e ndum .6
B a c k t o i n s a n d o u t s
T hi s i s w he r e t he U K ’ s a r gum e nt ove r i t s f ut ur e i m pi nge s bot h on t he
f ut ur e o f t he e ur o a nd on t he r e l a t i ons hi p be t w e e n i ns a nd out s . C a m e r on
m a y not w i n e nough vot e s i n 2015 t o f or m a s i ngl e – pa r t y gove r nm e nt , s o
hi s t hr e a t t o hol d a r e f e r e ndum i n 2017 m a y be c om e m oot . B ot h t he ot he r
m a i n pa r t y l e a d e r s a r e r e f us i ng t o of f e r a r e f e r e ndum unl e s s t he r e i s a
s ubs t a nt i a l ne w t r e a t y t r a ns f e r r i ng pow e r s t o B r us s e l s , but pr e s s ur e on
t he m i s l i ke l y t o gr ow . E i t he r w a y , que s t i ons a bout t he U K ’ s c ont i nui ng
m e m be r s hi p a r e l i ke l y t o pe r s i s t . Y e t t he a t t e nt i on of m os t ot he r E ur ope a n
l e a de r s w i l l c ont i nue t o be f oc u s e d m or e on f i xi ng t he e ur o c r i s i s t ha n on
w ha t s or t of c onc e s s i ons t o ke e p t he U K i n t he E U m i ght be a c c e pt a bl e .
M os t E U l e a de r s , e s pe c i a l l y M e r ke l , w oul d l i ke t o ke e p t he U K i n.
M or e ove r , s e ve r a l c ount r i e s , i nc l udi ng t he N e t he r l a nds , S w e de n a nd
D e nm a r k a s w e l l a s G e r m a ny , a r e s ym pa t he t i c t o m uc h of C a m e r on’ s
a ge nda . T he r e i s a ge ne r a l de s i r e t o c ut ba c k e xc e s s i ve E U r e g ul a t i on a nd
t o r e i n i n t he E u r ope a n C om m i s s i on a nd E ur ope a n P a r l i a m e nt . Y e t t he r e i s
a l i m i t t o t he c ha nge s ot he r c ount r i e s m i ght be w i l l i ng t o m a ke t o ke e p t he
U K i n, a nd c e r t a i nl y no de s i r e t o gi ve i t s pe c i a l opt – out s or ot he r
a r r a nge m e nt s t h a t m i ght be ne f i t one c ount r y a t t he a ppa r e nt e xpe ns e of
ot he r s . A nd t he r e i s a c onc e r n t ha t , w ha t e ve r i s of f e r e d t o t he U K , i t s
vot e r s m i ght c hoos e t o l e a ve t he E U a nyw a y , a n e ve nt ua l i t y t ha t s om e w ha t
w e a ke ns B r i t i s h ba r ga i ni ng pow e r i n ne got i a t i ng a ne w de a l .
W ha t m i ght c l i n c h t ha t out c om e i s a ny gr ow t h i n f e e l i ng t ha t t he e ur o-
z one i ns a r e de t e r m i ne d t o go a he a d w i t h i nt e gr a t i oni s t m e a s ur e s ,

i nc l udi ng pos s i b l y f ur t he r c ha nge s a ppl yi ng t o t he m a l one , t ha t i gnor e t he
w i s he s or i nt e r e s t s of non- e ur o c ount r i e s . B y not j oi ni ng t he e ur o, t he
B r i t i s h g ove r nm e nt ha s s how n i t s e l f t o be c ont e nt t o be i n t he out e r c i r c l e
of a E ur ope of c onc e nt r i c c i r c l e s . B ut t ha t doe s not i ne vi t a bl y ha ve t o
m e a n be i ng l e f t on t he f r i nge s of a l l pol i c y- a nd de c i s i on- m a ki ng. I n hi s
f i r s t bi g s pe e c h on E ur ope i n J a nua r y 2014, O s bor ne e xpr e s s e d hi s ow n
c onc e r ns a bout t he out s be i ng di s c r i m i na t e d a ga i ns t , a ddi ng t ha t w i t hout
r e f or m , t he U K m i ght f a c e t he c hoi c e be t w e e n j oi ni ng t he e ur o, w hi c h i t
w oul d n e ve r do , a nd l e a vi ng t h e E U . P e r ha ps i r oni c a l l y , gi ve n t hi s w or r y ,
he a l s o s ugge s t e d t ha t i n s om e c a s e s a c t i ons t o de e pe n t he s i n gl e m a r ke t
c oul d be t a ke n by us i ng e nha nc e d c o- ope r a t i on.7
I f t he out s a r e t o f e e l pr ot e c t e d, how e ve r , pol i c i e s i n a r e a s a s di ve r s e a s
t he s i ng l e m a r ke t , t he e nvi r onm e nt , t a xa t i on, t r a de a nd t r a ns por t s houl d
l a r ge l y c ont i nue t o be m a de a t 28, a s m or e obvi ous l y s houl d f or e i gn a nd
s e c ur i t y pol i c y . I f M e r ke l a nd he r a l l i e s a c c e pt t he i de a of m a ki ng pol i c y
i n a ny of t he s e a r e a s a t 18, t he r i s k of t he U K ’ s e xi t f r om t he br oa de r E U
c a n onl y i nc r e a s e , a s O s bor ne a r gue d. T he br oa de r w or r i e s of t he out s
w oul d i nc r e a s e a s w e l l . T he F r e nc h “ E i f f e l ” gr oup ha s pr opos e d
s t r e ngt he ni ng e u r o- z one i ns t i t ut i ons , m a ki ng t hi s pr obl e m pot e nt i a l l y e ve n
w or s e . A l l t hi s s ugge s t s t ha t a n i m por t a nt pa r t of t he a ge nda f or e ur o- z one
c ount r i e s i n t he ne xt f e w ye a r s s houl d be a be t t e r a r r a nge m e nt of r e l a t i ons
be t w e e n i ns a nd out s .
T he f e a r of out s t ha t i n f ut ur e pol i c i e s m a y be m a de by i ns w i t hout
t he i r ha vi ng m uc h or e ve n a ny s a y e c hoe s a br oa de r f e a r of vot e r s : t ha t
i nc r e a s i ngl y t he E ur ope a n U ni on a nd t he e ur o z one a r e de c i d i ng m a t t e r s
w i t hout s uf f i c i e nt de m oc r a t i c c ont r ol . A s t he e ur o z one i nt e gr a t e s f ur t he r
a nd m or e i nt r us i ve l y , i t i s r un ni ng i nt o a huge pot e nt i a l r ow a bout t he
l e gi t i m a c y a nd de m oc r a t i c a c c o unt a bi l i t y of i t s a c t i ons . I nde e d, i t i s t hi s ,
r a t he r t ha n t he f i na nc i a l m a r ke t s , t ha t c oul d pos e one of t he bi gge s t r i s ks
t o t he E U ’ s f ut ur e .

9 D e m o c r a c y a n d i t s d i s c o n t e n t s
THE NOTION THAT THERE IS A DEMOCRATIC DEFIGT i n E ur o pe i s a l m os t a s ol d
a s t he E ur ope a n pr oj e c t i t s e l f . U nt i l 1979, w he n t he f i r s t e l e c t i ons t o t he
E ur ope a n P a r l i a m e nt w e r e he l d , none of t he E ur ope a n i ns t i t ut i ons w e r e
di r e c t l y e l e c t e d, a nd t he ga p be t w e e n or di na r y c i t i z e ns a nd de c i s i ons t a ke n
i n B r us s e l s w a s s e e n t o be a y a w ni ng one . N a t i ona l gove r nm e nt s , w hi c h
a r e e l e c t e d, a r e of c our s e r e pr e s e nt e d i n t he C ounc i l of M i ni s t e r s , t he
s e ni or l e gi s l a t i ve body . B ut m os t ha ve t e nde d t o ke e p qui e t a bout t he i r
ba r ga i ni ng a nd f e w a r e he l d t o a c c ount f or a c t i ons i n B r us s e l s by t he i r ow n
na t i ona l pa r l i a m e nt s . M or e ove r , t he s pr e a d of qua l i f i e d- m a j or i t y vot i ng
ha s m e a nt t ha t i ndi vi dua l gove r nm e nt s c a n now be f or c e d t o a c c e pt
pol i c i e s t ha t t he y ha ve t he m s e l ve s oppos e d.1
O ve r t i m e , va r i ous s ugge s t i ons ha ve be e n m a de f or f i l l i ng t hi s
de m oc r a t i c de f i c i t . I nc r e a s i ng t he pow e r s of t he E ur ope a n P a r l i a m e nt i s
one t ha t ha s be e n pur s ue d t hr ough a l m os t e ve r y t r e a t y . G r e a t e r
t r a ns pa r e nc y i n bot h t he C om m i s s i on a nd t he C ounc i l ha s l ong be e n
a not he r f a vour i t e . G r e a t e r de m oc r a t i c i nput i nt o t he C ounc i l o f M i ni s t e r s
t hr ough na t i ona l pa r l i a m e nt s ha s of t e n be e n ur ge d. S o s om e t i m e s ha s t he
i de a of s om e bo dy t ha t m or e d i r e c t l y i nvol ve s na t i ona l l e gi s l a t ur e s . A nd
t he r e i s i nc r e a s i ng r e c our s e t o r e f e r e ndum s t o a ppr ove ne w t r e a t i e s : no
f e w e r t ha n t e n w e r e pr om i s e d f or t he a bor t i ve c ons t i t ut i ona l t r e a t y ,
c om pa r e d w i t h j us t one f or t he S i ngl e E ur ope a n A c t of 1987.
N one of t he s e ha s pr ove d s a t i s f a c t or y a s a r e m e dy f or t he de f i c i t . T he
E ur ope a n P a r l i a m e nt ha s c ont i nue d t o di s a ppoi nt e ve n i t s m os t a r de nt
s uppor t e r s . T r a ns pa r e nc y ha s be e n i m pr ove d, but f e w or di na r y c i t i z e ns

unde r s t a nd e ve n t he ba s i c s of how t he E U w or ks ; i nde e d, m os t ha ve no
i de a w ha t t he d i f f e r e nc e i s be t w e e n t he C om m i s s i on a nd t he C ounc i l of
M i ni s t e r s . M os t na t i ona l pa r l i a m e nt s r e m a i n ba d a t hol di ng m i ni s t e r s t o
a c c ount f or de c i s i ons m a de i n C ounc i l m e e t i ngs , a nd a t t e m pt s t o ge t t he m
t o w or k t oge t he r ha ve l a r ge l y f a i l e d. A s f or r e f e r e ndum s , a l m o s t a s m a ny
ha ve be e n l os t a s w on, s o m os t gove r nm e nt s f e e l de c i de dl y ne r vous a bout
hol di ng a ny m or e .
I t i s t r ue t ha t publ i c s c e pt i c i s m a bout i ns t i t ut i ons ha s be e n a s s t r ong
( or s om e t i m e s e ve n s t r onge r ) a t na t i ona l a s a t E ur ope a n l e ve l . I n m a ny
c ount r i e s , t he l os s of f a i t h i n t he E ur ope a n P a r l i a m e nt , f or i ns t a nc e , i s
m a t c he d by a s i m i l a r or e ve n gr e a t e r l os s of be l i e f i n t he e f f i c a c y of t he
na t i ona l pa r l i a m e nt . M or e ove r , i n m a ny c ount r i e s dut i e s t ha t onc e
de vol ve d on di r e c t l y e l e c t e d gove r nm e nt s – m one t a r y pol i c y , e xc ha nge –
r a t e pol i c y or c om pe t i t i on pol i c y , s a y – ha ve be e n ha nde d t o une l e c t e d
bodi e s on t he ba s i s t ha t t he y w i l l be done be t t e r . Y e t t he r e i s s t i l l a bi gge r
c a us e f or c onc e r n w he n s om e t hi ng s i m i l a r ha ppe ns a t E ur ope a n l e ve l .
E ve n w he n c i t i z e ns a r e f e d up w i t h t he i r ow n gove r nm e nt or pa r l i a m e nt ,
t he y do not que s t i on t he i r l e gi t i m a c y or t he i r c ont i nui ng e xi s t e nc e . B ut
w he n i t ha ppe ns a t E ur ope a n l e ve l , w hi c h s e e m s m or e f or e i gn, m a ny que r y
bot h.
F ol l ow i ng t he na t i ona l m ode l , s om e c om m e nt a t or s ha ve a c c o r di ngl y
s ugge s t e d a s a n a l t e r na t i ve t ha t t he E ur ope a n U ni on s houl d r e s t on a
di f f e r e nt i de a a l t oge t he r : t ha t of out put r a t he r t ha n i nput l e gi t i m a c y . O n
t hi s ba s i s , t he r e i s no r e a l ne e d t o ge t hung up a bout de m oc r a t i c
a c c ount a bi l i t y a s s uc h. R a t he r , t he E ur ope a n pr oj e c t c a n be e xpe c t e d t o
ga i n a n d r e t a i n publ i c s uppor t – a nd t hus e nd up a c qui r i ng gr e a t e r
l e gi t i m a c y – s i m pl y by de l i ve r i ng good r e s ul t s . I f vot e r s c a n s e e t ha t ,
t ha nks t o t he E U , t he i r e c onom i e s a r e m or e s uc c e s s f ul t ha n t he y w oul d be
w i t hout i t , t he y w i l l be c ont e nt . I n t hi s c ont e xt i t he l ps w he n t he r e a r e
c onc r e t e r e s ul t s f r om E U a c t i ons t o poi nt t o: l ow e r a i r f a r e s or m obi l e –
phone r oa m i ng c ha r ge s , s a y .
Y e t t hr e e r e l a t e d de ve l opm e nt s ha ve l a r ge l y kybos he d e ve n t hi s not i on.
T he m os t obvi o us i s t ha t , f a r f r om be i ng s e e n t o de l i ve r c ons i s t e nt l y good
r e s ul t s , t he E ur ope a n U ni on a nd e s pe c i a l l y t he e ur o a r e now s e e n by l a r ge
num be r s of vot e r s t o be de l i ve r i ng m os t l y ba d one s . A c r os s m uc h of t he
c ont i ne nt , E ur ope ( a nd e s pe c i a l l y t he s i ngl e c ur r e nc y) i s t oda y a s s oc i a t e d

w i t h a us t e r i t y , s pe ndi ng c ut s , t a x i nc r e a s e s , r i s i ng j obl e s s ne s s a nd
c hr oni c a l l y s l ow gr ow t h. D e bt or c ount r i e s ha ve s e e n a pa r t i c ul a r l y s ha r p
f a l l i n e nt hus i a s m f or t he E ur op e a n pr oj e c t a s a r e s ul t ( s e e F i gur e 9.1 ) . B ut
e ve n i n c r e di t or c ount r i e s , w hi c h ha ve s uf f e r e d l e s s e c onom i c a l l y , E ur ope
a nd t he e ur o ha ve l os t t he i r a ppe a l , be c a us e t he y a r e now a s s oc i a t e d w i t h
ba i l – out s a nd t r a ns f e r s r a t he r t ha n w i t h r i s i ng pr os pe r i t y .
FIG 9.1 D i s a f f e c t i o n
Positive opinions of the EU, 2003–13, % polled
*Spring survey
S o u r c e : Eurobarometer autumn surveys
T hi s ne w m ood m us i c ha s be c om e e s pe c i a l l y di s c or da nt f or
E ur ophi l e s . T he i r m e s s a ge s t ha t t he E U w oul d boos t gr ow t h t hr ough i t s
s i ngl e m a r ke t , t ha t t he e ur o w ou l d i m pr ove c om pe t i t i ve ne s s by pr om ot i ng
r e f or m , a nd t ha t bot h gr oups w oul d pr ot e c t E ur ope a n c i t i z e n s f r om t he
pr e s s ur e of gl oba l i s a t i on a nd t he f a l l out f r om t he w or l d f i na nc i a l c r i s i s
ha ve f a l l e n f l a t . I ns t e a d, E ur os c e pt i c s e ve r yw he r e f e e l vi ndi c a t e d: t he i r
vi e w t ha t t he r e i s t oo m uc h r e gul a t i on by a r e m ot e E U bur e a uc r a c y a nd
t he i r w a r ni ngs a bout t he i ns a ni t y of a dopt i ng a s i ngl e c ur r e nc y w i t hout t he
r i ght i ns t i t ut i ons , w i t hout m ove s t ow a r ds pol i t i c a l uni on a nd w i t hout
e nough de m oc r a t i c c ont r ol s e e m t o ha ve be e n bor ne out by e ve nt s .
T he s e c ond c ons e que nt i a l de ve l opm e nt ha s be e n a s ha r p f a l l i n t he
popul a r i t y of t he E ur ope a n pr oj e c t , r i ght a c r os s E ur ope . P ol l s t a ke n i n

2013 by E ur oba r om e t e r , t he G e r m a n M a r s ha l l F und a nd t he P e w G l oba l
A t t i t ude s s ur ve y ha ve a l l c om e up w i t h s i m i l a r f i ndi ngs .2 E s p e c i a l l y i n t h e
s out h, b ut a l s o i n t he nor t h, a pp r ova l of t he E U ha s de c l i ne d f a s t i n r e c e nt
ye a r s . T he num be r of pe opl e w ho c ons i de r t he i r c ount r y’ s m e m be r s hi p t o
be a good t hi ng ha s a l s o f a l l e n . T he de c l i ne ha s be e n m os t pr e c i pi t a t e i n
M e di t e r r a ne a n c ount r i e s l i ke S pa i n a nd G r e e c e . B ut i t i s a l s o r e m a r ka bl e
i n F r a nc e , w he r e t he l a t e s t P e w s ur ve y f ound a n e ve n s m a l l e r pr opor t i on of
t he popul a t i on a ppr ovi ng of t he E U t ha n i n t he t r a di t i ona l l y E ur os c e pt i c
U K .
T hi s s ha r p di p i n t he E U ’ s popu l a r i t y i n opi ni on s ur ve ys i s r e f l e c t e d i n
t he r i s e of popul i s t pa r t i e s t ha t a r e a nt i – e ur o a nd a nt i – E U . S om e of t he s e
pa r t i e s a r e f r om t he f a r r i ght , s om e f r om t he f a r l e f t . O f t e n t h e y a r e a nt i –
f r e e t r a de a nd a nt i – gl oba l i s a t i on. I n m a ny c a s e s t he y a r e s t r ongl y a ga i ns t
i m m i gr a t i on, w hi c h i s i nc r e a s i n gl y a s s oc i a t e d w i t h t he E U be c a us e of i t s
e a s t w a r d e xpa ns i on t o t a ke i n not j us t t he c e nt r a l E ur ope a n c ount r i e s but
a l s o B u l ga r i a a nd R om a ni a , f or w hi c h f r e e m ove m e nt of l a bour a r r i ve d
onl y i n J a nua r y 2014 ( t he B r i t i s h a nd s om e ot he r gove r nm e nt s a r e t r yi ng
t o c ur t a i l be ne f i t e nt i t l e m e nt s f or s om e s pe c i f i e d gr oups of i m m i gr a nt s ) .
A nt i – I s l a m f e e l i ngs a l s o pl a y a r ol e . B ut t he i r ne w – f ound s t r e ngt h ow e s
m os t t o t he popul i s t s ’ a bi l i t y t o c ha nne l gr ow i ng a nt i – E U s e nt i m e nt .
T hus G r e e c e ha s s e e n t he r i s e not j us t of G ol de n D a w n, a n e xpl i c i t l y
e xt r e m e – r i ght p a r t y , but a l s o o f S yr i z a , a n a nt i – a us t e r i t y l e f t – w i ng pa r t y
t ha t i s r unni ng a he a d of t he r ul i ng N e w D e m oc r a c y pa r t y i n opi ni on pol l s .
S pa i n a nd P or t uga l ha ve , s o f a r , e s c a pe d t he r i s e of popul i s t pa r t i e s of t he
r i ght , bu t t he m or e e xt r e m e U n i t e d L e f t pa r t y i s doi ng w e l l i n S pa i n a nd
s uppor t f or t he t w o m a i ns t r e a m c e nt r e – r i ght a nd c e nt r e – l e f t pa r t i e s ha s
c ol l a ps e d. I t a l y ha s s e e n t he s p e c t a c ul a r r i s e of B e ppe G r i l l o’ s F i ve S t a r
m ove m e nt , w hi c h t ook a l m os t 25% of t he vot e i n t he e l e c t i on of F e br ua r y
2013, f or c i ng t he c e nt r e – l e f t a nd c e nt r e – r i ght pa r t i e s i nt o a n une a s y
c oa l i t i on. I n F r a nc e , M a r i ne L e P e n’ s N a t i ona l F r ont i s r unni ng c l os e t o
20% i n t he opi ni on pol l s .
T he r i s e of popul i s t s a nd e xt r e m i s t s i s not c onf i ne d t o t r oubl e d e ur o-
z one c o unt r i e s a l one . I n F i nl a nd, t he T r ue F i nns ( now t he F i nns P a r t y)
unde r T i m o S oi ni , w hi c h c a m e out of now he r e i n 2011, l a r ge l y t o pr ot e s t
a ga i ns t t he e ur o, a r e s c or i ng 2 0% or m or e i n m os t opi ni on pol l s . I n t he

N e t he r l a nds , G e e r t W i l de r s ’ P a r t y of F r e e dom i s a l s o r i di ng hi gh. W i l de r s
ha s f or m e d a n a l l i a nc e w i t h L e P e n f or t he E ur ope a n e l e c t i ons ,
c a m pa i gni ng on a n a nt i – E U , a nt i – e ur o pl a t f or m . T he U K I nde pe nde nc e
P a r t y ha s r e f us e d t o j oi n t hi s a l l i a nc e , but i t t oo ha s be e n s c or i n g hi ghl y i n
t he pol l s . A c r os s c e nt r a l a nd e a s t e r n E ur ope a s w a t he of e xt r e m i s t a nd
popul i s t pa r t i e s , f r om J obbi k i n H unga r y t o t he L e a gue of C a t hol i c
F a m i l i e s i n P ol a nd, a r e s i m i l a r l y doi ng w e l l .
A l m os t t he onl y c ount r y not t o ha ve s e e n a s ha r p ups ur ge i n a p opul i s t ,
a nt i – e ur o or a nt i – E U pa r t y i s G e r m a ny . I t i s a l s o one of t he f e w c ount r i e s
w he r e t h e num b e r of pe opl e w i t h a f a vour a bl e opi ni on of t he E U ha s not
f a l l e n s h a r pl y i n r e c e nt ye a r s . R e s i dua l G e r m a n w a r gui l t pl a ys a pa r t i n
hol di ng dow n e xt r e m i s t pa r t i e s . Y e t i t i s , on t he f a c e of i t , s ur pr i s i ng t ha t
a nt i – E U or a nt i – e ur o s e nt i m e nt ha s not m a de i t s e l f f e l t , a s t he G e r m a n
publ i c ha s s how n i t s e l f de e pl y hos t i l e t o t he w hol e not i on of ba i l – out s a nd
t r a ns f e r s t o M e di t e r r a ne a n c ount r i e s . M or e ove r , a ne w pa r t y , A l t e r na t i ve
f or G e r m a ny , ha s be e n e s t a bl i s h e d a nd, a l t hough i t na r r ow l y f a i l e d t o ge t
i nt o t he B unde s t a g i n t he S e pt e m be r 2013 e l e c t i on, i t s pol l r a t i ngs ha ve
s i nc e be e n r i s i ng. T he r e a l r e a s on G e r m a ny l ooks di f f e r e nt f r om ot he r
c ount r i e s m a y be t ha t i t ha s s uf f e r e d l i t t l e dur i ng t he e ur o c r i s i s . B e s i de s ,
G e r m a n vot e r s ha ve c om e t o t r us t M e r ke l not t o l e t t he m dow n.
T h e s e a r c h f o r l e g i t i m a c y
T he t hi r d a nd pe r ha ps m os t di f f i c ul t c ha l l e nge i s a di r e c t r e s ul t of t he e ur o
c r i s i s i t s e l f . A s di s c us s e d e a r l i e r , a l a r ge pa r t of t he pol i c y r e s pons e ha s
be e n t o m ove t ow a r ds de e pe r pol i t i c a l i nt e gr a t i on i n t he e ur o z one . T he
f i s c a l c om pa c t , t he E ur ope a n s e m e s t e r , t he t w o- pa c k, t he s i x- pa c k a nd t he
r e s t a dd up t o f a r m or e i nt r us i ve m oni t or i ng of na t i ona l gove r nm e nt s ’
f i s c a l a nd e c onom i c pol i c i e s . T he C om m i s s i on now ha s t he r e s pons i bi l i t y
t o ve t a nd, i f ne e d be , pr opos e c ha nge s t o na t i ona l gove r nm e nt s ’ budge t s
e ve n be f or e t he i r pa r l i a m e nt s ha ve s e e n t he m . C om i ng on t op of t he l os s
of m one t a r y a nd e xc ha nge – r a t e pol i c y due t o t he i nt r oduc t i on of t he e ur o,
t he r e s u l t i s a s i gni f i c a nt t r a ns f e r of pow e r f r om na t i ona l t o E ur ope a n
l e ve l .
I t s houl d not be a s ur pr i s e t ha t one c ons e que nc e i s a c r i s i s of
de m oc r a t i c a c c ount a bi l i t y . A s a s e ni or G e r m a n f i na nc e m i ni s t r y of f i c i a l

put i t t o U l r i ke G ué r ot a nd T hom a s K l a u of t he E ur ope a n C ounc i l on
F or e i gn R e l a t i ons i n 2012, “ t he w e a kne s s of t he s ys t e m i s not a bout
s pe ndi ng a nd how t o pr om ot e gr ow t h, but a bout l e gi t i m a c y” .3 S om e of
t hos e w ho pus he d f or a s i ngl e c ur r e nc y a t a nd be f or e M a a s t r i c ht a l w a ys
t hought i t w oul d t a ke c l os e r pol i t i c a l uni on f or i t t o w or k s a t i s f a c t or i l y –
i nde e d, a f e w p r e s s e d f or E M U pr e c i s e l y be c a us e t he y t houg ht i t w oul d
f or c e t h e c r e a t i on of a U ni t e d S t a t e s of E ur ope . B ut m os t vot e r s a nd m os t
gove r nm e nt s w e r e not pe r s ua de d. N ow a f or m of pol i t i c a l uni o n i s i nde e d
be i ng br ought i n, not , how e ve r , a s a pos i t i ve r e s ul t of c a r e f ul na t i ona l
de ba t e a nd a s a c ons e que nc e of e c onom i c s uc c e s s , but r a t he r a s a ne ga t i ve
out c om e t o w a r d of f e c onom i c f a i l ur e . T ha t s ur e l y w i l l m a ke i t e ve n
ha r de r t o pe r s ua de vot e r s t o s uppor t t he e nt i r e not i on of pol i t i c a l uni on.
I t doe s not he l p t ha t i n pa r t s of E ur ope de m oc r a c y i s goi ng t hr ough
s om e t hi ng of a c r i s i s a t hom e . T he r e a r e m a ny m a ni f e s t a t i ons of t hi s . O ne
w a s t he f a c t t ha t bot h G r e e c e a nd I t a l y ha d t e c hnoc r a t i c pr i m e m i ni s t e r s
t hr us t on t he m dur i ng t he e ur o c r i s i s . G r e e ks ha ve l ong be e n f e d up w i t h
t he i r pol i t i c a l l e a de r s . I n I t a l y , vot e r s ha ve be c om e i nc r e a s i ngl y
di s i l l us i one d w i t h t he i r e nt i r e pol i t i c a l c l a s s , of t e n know n a s L a C as t a a nd
w i de l y r e vi l e d f or i t s e xc e s s i v e c os t a nd m a ny pr i vi l e ge s . Y e t ne i t he r
c ount r y w a s ha ppy t o ha ve une l e c t e d l e a de r s a ppoi nt e d i n pl a c e of e l e c t e d
one s . I t w a s t hi s , pe r ha ps m or e t ha n a l os t l ove f or E ur ope , t ha t l e d s o
m a ny G r e e ks t o vot e f or f r i nge pa r t i e s i n M a y 2012 a nd s o m a ny I t a l i a ns
t o ba c k G r i l l o’ s F i ve S t a r m ove m e nt i n F e br ua r y 2013. I n e a s t e r n E ur ope ,
B ul ga r i a ns ha ve s pe nt m os t of t he pa s t t w o ye a r s pr ot e s t i ng i n t he s t r e e t s
a ga i ns t t he i r gove r nm e nt . R om a ni a ns s e e m e qua l l y f e d up w i t h a l ong-
r unni ng f e ud be t w e e n t he i r pr e s i de nt a nd t he i r pr i m e m i ni s t e r .
H unga r y de s e r v e s a s pe c i a l m e nt i on he r e , a s i t ha s r un i nt o m uc h
c onde m na t i on i n B r us s e l s . V i kt or O r ba n’ s c e nt r e – r i ght F i de s z pa r t y w on a
s m a s hi ng e l e c t or a l vi c t or y i n 2010 a f t e r t he out goi ng S oc i a l i s t gove r nm e nt
be c a m e di s c r e d i t e d. B ut O r ba n pr oc e e de d t o r e w r i t e t he c ons t i t ut i on i n
w a ys t ha t c e m e nt e d F i de s z ’ s dom i na nc e ove r H unga r y’ s i ns t i t ut i ons a nd i t s
i nt i m i da t i ng c ont r ol of t he c ount r y’ s m e di a . A l t hough t he E U ha s m a na ge d
t o ge t t he gove r n m e nt t o r e w r i t e pr ovi s i ons i m pi ngi ng on c e nt r a l – ba nk a nd
j udi c i a l i nde pe nde nc e , i t ha s f ound i t s l e ve r a ge ove r t he gove r nm e nt
w or r yi ngl y l i m i t e d. A s w a s di s c ove r e d a s l ong a go a s 2000, w he n t he E U

t r i e d t o f r e e z e r e l a t i ons w i t h a n A us t r i a n gove r nm e nt t h a t i nc l ude d t he f a r –
r i ght J ör g H a i de r a s a c oa l i t i on pa r t ne r , a c ount r y t ha t i s a f ul l m e m be r i s
m uc h l e s s s us c e pt i bl e t o out s i de pr e s s ur e t ha n a n a ppl i c a nt . M or e ove r ,
O r ba n’ s m e m be r s hi p of t he c e nt r e – r i ght E ur ope a n P e opl e ’ s P a r t y
t r a ns na t i ona l gr oup i s of t e n s a i d t o ha ve r e s t r a i ne d hi s f e l l o w he a ds of
gove r nm e nt f r om be i ng t oo ha r s h on hi m . T he r e s ul t ha s be e n t o da m a ge
t he c a us e of l i be r a l de m oc r a c y i n i t s br oa de s t s e ns e .4
N ow t he c ha l l e nge f r om t he e ur o c r i s i s t hr e a t e ns t o m a ke m a t t e r s
w or s e . I nde e d, i n t he i r f i r s t e nc ount e r w i t h t he E ur ope a n s e m e s t e r , s e ve r a l
na t i ona l l e a de r s , e ve n t hos e no r m a l l y t hought of a s pr o- E ur ope a n, w e nt
out of t he i r w a y t o c r i t i c i s e t he C om m i s s i on f or i t s i nt r us i ve n e s s . S pa i n’ s
M a r i a no R a j oy a nnounc e d i n 2012 t ha t i t w a s f or hi s gove r nm e nt , not t he
C om m i s s i on, t o de c i de t he r i ght l e ve l of t he S pa ni s h budge t de f i c i t . I n
F r a nc e , H ol l a nd e e a r l y on de c l a r e d t ha t , w hi l e t he C om m i s s i on w a s w i t hi n
i t s r i ght s t o de m a nd pe ns i on r e f or m , hi s gove r nm e nt s houl d be l e f t t o
de c i de w ha t s or t of c ha nge s t o m a ke a nd how qui c kl y t o m a ke t he m . T he
I t a l i a n gove r nm e nt r e j e c t e d a c r i t i c i s m of i t s l onge r – t e r m de bt
s us t a i na bi l i t y . A nd w he n B e l gi um , t he m os t pr o- E ur ope a n c ou nt r y of a l l ,
w a s r e buke d ove r i t s budge t d e f i c i t , one B e l gi a n gove r nm e nt m i ni s t e r
a s ke d a l oud: “ W ho i s O l l i R e hn? ” ( t he e c onom i c – a f f a i r s c om m i s s i one r ) .5
Y e t i t i s t oo s i m pl e t o s e e t he pr obl e m a s m e r e l y one of e xc e s s i ve
C om m i s s i on i nt e r f e r e nc e i n m a t t e r s be t t e r l e f t t o e l e c t e d na t i ona l
gove r nm e nt s . T ha t w a s t o s om e e xt e nt t r ue w he n i t c a m e t o t he ope r a t i on
of t he s t a bi l i t y a nd gr ow t h pa c t . W he n G e r ha r d S c hr öde r a nd J a c que s
C hi r a c c a m e t oge t he r i n 2003 t o ove r t ur n a ny s ugge s t i on of C om m i s s i on-
i m pos e d s a nc t i o ns on t he i r t w o c ount r i e s f or br e a c hi ng t he t e r m s of t he
pa c t , t he y w e r e s i m pl y a s s e r t i n g gr e a t e r l e gi t i m a c y f or e l e c t e d pol i t i c a l
l e a de r s . T he r e w a s l i t t l e i n t he w a y of br oa de r e c onom i c f a l l out . I nde e d,
t ha t i s pr e c i s e l y w hy t he i r c ol l e a gue s , w i t h t he pa r t i a l e xc e pt i on of t he
r ul e – l ovi ng D ut c h, m a de s o l i t t l e f us s a bout t he de m i s e of t he pa c t a t t he
t i m e .6
B ut t he e ur o c r i s i s ha s c ha nge d t hi s c om pl e t e l y , by br i ngi ng i nt o t he
pi c t ur e na t i ona l l y s a nc t i one d r e s c ue f unds . A ba i l – out of a n e xc e s s i ve l y
i nde bt e d c ount r y ha s t o be a p pr ove d by na t i ona l a ut hor i t i e s , i nc l udi ng
na t i ona l pa r l i a m e nt s , be c a us e ul t i m a t e l y i t m us t r e s t on t he c r e di t of

s ove r e i gns . A s be c a m e c l e a r i n M a y 2010, t he E U budge t i s t oo s m a l l f or
t hi s pur pos e . F or s uc h a f und t o a t t r a c t i t s A A A r a t i ng, i t r e qui r e s
gua r a nt e e s f r om c r e di t w or t hy g ove r nm e nt s . A nd i n na t i ona l de m oc r a c i e s ,
t ha t ne e ds t he ba c ki ng of na t i ona l pa r l i a m e nt s . T hi s i s one r e a s on t he i s s ue
of d e m oc r a t i c a c c ount a bi l i t y i n E ur ope ha s be c om e s o a c ut e . W he n i t i s
c l e a r t ha t s om e t hi ng ha s t o be de c i de d a t E ur ope a n l e ve l , t he E U t r e a t i e s
ha ve a s upr a na t i ona l , i f not a l w a ys s a t i s f a c t or y , m e c ha ni s m of
a c c ount a bi l i t y . W he n de c i s i ons a r e w hol l y na t i ona l , s i m i l a r l y , a na t i ona l
s ys t e m s houl d w or k. B ut i n t he e ur o c r i s i s de c i s i ons a r e , i n e f f e c t , hybr i d:
t he y a r e t a ke n a t a E ur ope a n l e ve l , but t he f unds be i ng c om m i t t e d a r e
pr ovi de d na t i ona l l y . I n s uc h c a s e s i s s ue s of a c c ount a bi l i t y a nd de m oc r a t i c
c ont r ol c a n a l l t oo e a s i l y f a l l t hr ough t he c r a c ks .
H e nc e t he e xpe r i e nc e of t he F i nni s h pa r l i a m e nt ( E dus kunt a ) , w hi c h ha s
r e pe a t e dl y de m a nde d s pe c i f i c c ol l a t e r a l f or l oa ns t o G r e e c e a nd ot he r s .
A nd he nc e a l s o t he gr ow i ng r ol e of t he G e r m a n B unde s t a g i n de m a ndi ng
t he r i ght t o a pp r ove e ve r y ba i l – out i ndi vi dua l l y . T he B unde s t a g’ s de m a nd
f or a s a y i n ba i l – out s i s s t r ongl y s uppor t e d by a not he r c r uc i a l G e r m a n
i ns t i t ut i on, t he B unde s ve r f a s s un gs ge r i c ht , or c ons t i t ut i ona l c our t , ba s e d i n
K a r l s r uhe . T he c ons t i t ut i ona l c our t ha s pl a ye d a bi g r ol e i n t he e ur o c r i s i s ,
c hi e f l y be c a us e a num be r of p l a i nt i f f s ha ve r e pe a t e dl y pe t i t i one d i t t o
de c l a r e va r i ous de c i s i ons t o be unc ons t i t ut i ona l be c a us e t he y i nf r i nge t he
G e r m a n ba s i c l a w – r a ngi ng f r om t he f i r s t G r e e k ba i l – out t o t he
e s t a bl i s hm e nt of t he E ur ope a n S t a bi l i t y M e c ha ni s m t o t he E C B ’ s
pr ogr a m m e of out r i ght m one t a r y t r a ns a c t i ons ( O M T ) t o s uppor t
s ove r e i gn- bond m a r ke t s . S o f a r t he c our t ha s not r ul e d a ga i n s t a nyt hi ng,
but i t ha s of t e n he dge d i t s ve r di c t s w i t h l a ngua ge s ugge s t i ng t ha t t he r e a r e
l i m i t s t o how f a r t he f e de r a l go ve r nm e nt i n B e r l i n c a n go. I n t he c a s e of
O M T , i t m a de i t s di s a ppr ova l c l e a r but t r a ns f e r r e d t he c a s e t o t he
E ur ope a n C our t f or a r ul i ng. I t ha s a l s o m a de c l e a r , i nc l udi ng i n i t s r ul i ng
on t h e L i s bon t r e a t y , t ha t i t doe s not s e e t he E ur ope a n U ni on’ s de m oc r a t i c
c r e de nt i a l s a s s uf f i c i e nt l y s t r ong.7
M a ny E ur o- e nt hus i a s t s a r e hor r i f i e d bot h by t he K a r l s r uhe c our t a nd
by t he B unde s t a g’ s a s s e r t i on of c ont r ol ove r ba i l – out de c i s i ons . T he y s e e a
c r e e pi ng r e na t i ona l i s a t i on a t w o r k, a l l of a pi e c e w i t h M e r ke l ’ s ne w – f ound
e nt hus i a s m f or i nt e r – gove r nm e nt a l i s m a nd t he “ uni on m e t hod” a t t he

e xpe ns e of t he t r a di t i ona l c om m uni t y m e t hod. G e r m a ny’ s l a c k of
e nt hus i a s m f or t he E U i ns t i t ut i ons , not a bl y t he C om m i s s i on but a l s o t he
E ur ope a n P a r l i a m e nt , w hi c h us e d a l w a ys t o a t t r a c t s t r ong G e r m a n s uppor t ,
i s t o t he m pa r t of t he s a m e pa t t e r n. W ha t s uc h e nt hus i a s t s t e n d t o f a vour
i ns t e a d a s a w a y t o i nj e c t m or e de m oc r a t i c a c c ount a bi l i t y i nt o E U – r e l a t e d
de c i s i ons i s t o gi ve a m uc h gr e a t e r r ol e t o t he onl y di r e c t l y e l e c t e d E U
i ns t i t ut i on: t he P a r l i a m e nt i n S t r a s bour g. Y e t t hi s r uns i nt o huge pr obl e m s
of i t s ow n.
S t r a s b o u r g b l u e s
T he P a r l i a m e nt i s c e r t a i nl y r e a dy a nd e a ge r t o s t e p f or w a r d. I t ha s a l r e a dy
pl a ye d a c ons t r uc t i ve r ol e i n dr a w i ng up t he ne c e s s a r y l e gi s l a t i on f or t he
E ur ope a n s e m e s t e r . I t w a nt s t o do m or e i n t he w a y of s c r ut i ny of t he
C om m i s s i on’ s d e c i s i ons a nd of a ny c ont r a c t s f or r e f or m t ha t na t i ona l
gove r nm e nt s m i ght a c c e pt . Y e t t he not i on t ha t i t c a n he l p t o f i l l t he ga p i n
t he e ur o z one ’ s de m oc r a t i c a c c ount a bi l i t y a nd i n pr ovi di ng gr e a t e r
l e gi t i m a c y f or t he s ys t e m t o o r di na r y vot e r s i s f a r – f e t c he d a nd m a y be
hi ghl y da nge r ous , f or f our r e a s ons .
T he f i r s t i s i ns t i t ut i ona l . T he P a r l i a m e nt i s qui nt e s s e nt i a l l y a body t ha t
br i ngs t oge t he r r e pr e s e nt a t i ve s f r om a l l 28 E U c ount r i e s . I t w a s r e l a t i ve l y
e a s y f or t he C ounc i l of M i ni s t e r s t o e s t a bl i s h a s ub- f or m a t i on i n t he
E ur ogr oup a nd now t he E ur ogr o up s um m i t . I t i s a l s o f a i r l y s i m pl e t o f or m
a t a c i t unde r s t a ndi ng t ha t t he e c onom i c s c om m i s s i one r a s w e l l a s t he
C om m i s s i on pr e s i de nt s houl d, l i ke t he pr e s i de nt s of t he E C B a nd of t he
E ur ope a n C ounc i l , c om e f r om a e ur o- z one c ount r y . I t i s m uc h ha r de r t o do
t he s a m e i n t he P a r l i a m e nt . I nde e d, t he c ha i r of t he e c onom i c a nd
m one t a r y a f f a i r s c om m i t t e e dur i ng m os t of t he e ur o c r i s i s ha s be e n S ha r on
B ow l e s , a B r i t i s h L i be r a l D e m oc r a t . S om e ha ve m ut t e r e d a bout t hi s , a nd a
f e w e nt hus i a s t s , i nc l udi ng t he F r e nc h E i f f e l gr oup, ha ve e ve n s ugge s t e d
s e t t i ng up a s e pa r a t e or “ i nne r ” e ur o- z one pa r l i a m e nt . B ut t o m os t t hi s
w oul d e xc e s s i ve l y i ns t i t ut i ona l i s e t he a l r e a dy w or r yi ng di vi de be t w e e n
e ur o i ns a nd e ur o out s .
A s e c ond obj e c t i on i s t ha t t he P a r l i a m e nt i t s e l f l a c ks l e gi t i m a c y . I t ha s
be e n di r e c t l y e l e c t e d f or t he pa s t 44 ye a r s , ye t t he t ur nout i n s uc c e s s i ve
e l e c t i ons ha s s t e a di l y f a l l e n. E u r ope a n e l e c t i ons e ve r yw he r e a r e t r e a t e d a s

e s s e nt i a l l y na t i ona l pol l s , i n w hi c h vot e r s t ypi c a l l y r e gi s t e r pr ot e s t s
a ga i ns t t he i r gove r nm e nt s or ba c k popul i s t pa r t i e s . T he r e i s no s e ns e
a m ong vot e r s of a ny E ur ope – w i de pol i t i c a l pa r t i e s : f e w ha ve h e a r d of t he
m a i n po l i t i c a l g r oups or ha ve a ny c l ue a bout w ha t t he y a c t ua l l y s t a nd f or .
T he r e s u l t s of E ur ope a n e l e c t i o ns a r e not s e e n t o t r a ns l a t e i n a ny w a y i nt o
c ha nge s of e xe c ut i ve pow e r w i t hi n t he E U ; t he y do not e ve n de t e r m i ne t he
pr e s i de nc y of t he P a r l i a m e nt , s i nc e t hi s i s di vi de d be t w e e n t he t w o bi gge s t
gr oups f or t he t e r m of e a c h l e gi s l a t ur e . F e w pe opl e ha ve a ny i d e a w ha t t he
P a r l i a m e nt doe s or w ho t he i r M E P i s . I n s hor t , f or m os t or di na r y
E ur ope a ns t he P a r l i a m e nt s e e m s t o be pa r t of t he pr obl e m of r e m ot e a nd
l a r ge l y una c c ount a bl e E U i ns t i t ut i ons , a nd not pa r t of t he s ol ut i on.
V a r i ous r e m e di e s ha ve be e n s ugge s t e d f or t he s e i l l s . O ne ol d f a vour i t e
i s t o gi ve t he P a r l i a m e nt m or e pow e r s , w hi c h ha s be e n done s o m uc h t ha t
f or m os t pur pos e s i t ha s be c om e a c o- e qua l l e gi s l a t or w i t h t he C ounc i l of
M i ni s t e r s . T he i de a i s t ha t i f t h e P a r l i a m e nt i s s e e n t o be e xe r c i s i ng f ul l e r
pow e r s i n t he E U , vot e r s w i l l t a ke i t m or e s e r i ous l y . A nd i nde e d t he
P a r l i a m e nt , e s pe c i a l l y t hr ough i t s c om m i t t e e s , ha s be c om e a n i m por t a nt
a nd a t t i m e s e xt r e m e l y va l ua bl e pa r t of t he l e gi s l a t i ve pr oc e s s , of t e n
i m pr ovi ng di r e c t i ve s a nd r e gul a t i ons m or e e f f e c t i ve l y t ha n t he C ounc i l .
M a ny pe opl e c i t e t he e xa m pl e s of t he R E A C H c he m i c a l s r u l e s a nd t he
s e r vi c e s di r e c t i ve , w hi c h w a s i n pa r t r e s ur r e c t e d by t he P a r l i a m e nt , a s
e xa m pl e s .
Y e t e ve n E ur ophi l e s r e m a i n di s s a t i s f i e d w i t h t he P a r l i a m e nt . A
be l i e ve r i n de m oc r a c y m i ght e xpe c t t he t hr e e bi gge s t gr oups , t he c e nt r e –
r i ght E ur ope a n P e opl e ’ s P a r t y ( E P P ) , t he c e nt r e – l e f t P r ogr e s s i ve A l l i a nc e
of S oc i a l i s t s a nd D e m oc r a t s ( S & D ) a nd t he c e nt r i s t A l l i a nc e of L i be r a l s
a nd D e m oc r a t s f or E ur ope ( A L D E ) , t o de ba t e f r om t he i r di f f e r e nt pol i t i c a l
s t a ndpoi nt s a nd vot e a c c or di ng l y , a s ha ppe ns i n na t i ona l pa r l i a m e nt s . B ut
f a r m or e of t e n t he bi g gr oups c om e t oge t he r t o m a ke t he P a r l i a m e nt m or e
of a l obb y or non- gove r nm e nt a l or ga ni s a t i on t ha t s e t s i t s e l f up a ga i ns t t he
C om m i s s i on a nd t he C ounc i l of M i ni s t e r s , r a t he r t ha n a c t i ng l i ke a nor m a l
l e gi s l a t ur e . T he P a r l i a m e nt i s f ond of pa s s i ng l a r ge l y m e a ni ngl e s s f or e i gn-
pol i c y r e s ol ut i ons . U nl i ke m os t na t i ona l pa r l i a m e nt s , i t a l w a ys w a nt s bot h
m or e pow e r s f or i t s e l f a nd a bi gge r budge t – s om e t hi ng f e w o f i t s vot e r s
w oul d s uppor t . T he di vi de be t w e e n vot e r s a nd t he i r M E P s w a s m a de
s t a r kl y c l e a r w he n t he D ut c h a nd F r e nc h ove r w he l m i ngl y r e j e c t e d t he

c ons t i t ut i ona l t r e a t y , w hi c h ha d be e n a ppr ove d by a l m os t a l l t he M E P s
f r om t hos e c ount r i e s .
A not he r s ugge s t i on ha s be e n t o gi ve t he P a r l i a m e nt a bi gge r a nd m or e
e xpl i c i t r ol e i n c hoos i ng t he C om m i s s i on, e s pe c i a l l y i t s pr e s i de nt . T he
L i s bon t r e a t y pr ovi de s t ha t t he E ur ope a n C ounc i l , t a ki ng a c c ount of t he
r e s ul t s of t he E ur ope a n e l e c t i ons , s houl d nom i na t e a c a ndi d a t e , w ho i s
t he n “ e l e c t e d” by a n a bs ol ut e m a j or i t y of t he P a r l i a m e nt . ( T he P a r l i a m e nt
i s a l s o r e qui r e d t o a ppr ove t he e nt i r e c ol l e ge of c om m i s s i one r s , but not
e a c h i nd i vi dua l , t hi s t i m e by s i m pl e m a j or i t y .) M os t of t he pol i t i c a l gr oups
ha ve t a ke n t hi s l a ngua ge a s a n e xc us e t o put f or w a r d t he i r pr e f e r r e d
c a ndi da t e f or t he C om m i s s i on pr e s i de nc y be f or e t he E ur ope a n e l e c t i ons .
T he S & D gr oup, f or i ns t a nc e , ha s pr opos e d t he c ur r e nt pr e s i de nt of t he
P a r l i a m e nt , M a r t i n S c hul z ; t he A L D E ha s put f or w a r d i t s l e a de r , G uy
V e r hof s t a dt ; a nd t he E P P i s pr opos i ng J e a n- C l a ude J unc ke r . T he i de a i s
t ha t t hi s s houl d m a ke t he e l e c t i ons m a t t e r m or e t o vot e r s , s i nc e t he y w i l l ,
i n e f f e c t , be i ndi r e c t l y c hoos i ng t he ne xt C om m i s s i on pr e s i de nt .
Y e t t hi s s ol ut i on t o t he de m oc r a t i c de f i c i t i s unl i ke l y t o he l p. M os t
or di na r y pe opl e r e m a i n pr of oundl y i gnor a nt bot h of t he pol i t i c a l gr oups
t ha t a r e pr opos i ng c a ndi da t e s a nd of t he c a ndi da t e s t he m s e l ve s : i t i s ha r d
t o s e e B r i t i s h L a bour vot e r s , s a y , t ur ni ng out i n l a r ge num b e r s be c a us e
t he y a r e e nt hus e d a bout t he pr os pe c t of S c hul z a s t he C om m i s s i on
pr e s i de nt . W or s e , by m a ki ng t he C om m i s s i on m or e be hol de n t o t he
P a r l i a m e nt t ha n i t a l r e a dy i s , t he pl a n w oul d ups e t t he E U ’ s i ns t i t ut i ona l
s t r uc t ur e . U nl i ke t he P a r l i a m e nt , t he C ounc i l of M i ni s t e r s c a nnot s a c k t he
C om m i s s i on; i f t he P a r l i a m e nt ha s t he de c i s i ve voi c e i n t he C om m i s s i on
pr e s i de nc y , t hi s w oul d a ggr a va t e t he i m ba l a nc e , m a ki ng i t a l l t he m or e
l i ke l y t ha t t he C om m i s s i on a nd P a r l i a m e nt w oul d c om e t oge t he r t o a c t
a ga i ns t na t i ona l gove r nm e nt s . A nd w or s t of a l l , t he pl a n w o ul d s ha r pl y
r e duc e t he f i e l d of c a ndi da t e s t o be c om e pr e s i de nt of t he C om m i s s i on: no
i nc um be nt gove r nm e nt l e a de r w oul d be r e a dy t o s t e p dow n t o c a m pa i gn a s
pa r t of t he E ur ope a n e l e c t i ons .8
B e s i de s t he E ur ope a n P a r l i a m e nt ’ s ow n f a i l i ngs a s a n i ns t i t ut i on t ha t
c a n f i l l t he E U ’ s a nd t he e ur o z one ’ s de m oc r a t i c de f i c i t s , t he r e i s a t hi r d
r e a s on t o doubt t ha t i t w i l l be t he a ns w e r . T hi s i s t ha t a n i nc r e a s i ng num be r
of popul i s t s a nd e xt r e m i s t s a r e now r e pr e s e nt e d i n t he P a r l i a m e nt . O n one

l e ve l , t h i s c oul d be s e e n a s pos i t i ve : a t l e a s t t hi s s t r a nd of opi ni on, of t e n
hos t i l e t o bot h t he E U a nd t he e ur o, w i l l be f ul l y r e pr e s e nt e d i n t he
E ur ope a n i ns t i t ut i ons . B ut t he pr e s e nc e of s uc h a de s t r uc t i ve gr oup of
oddba l l s , l ooni e s a nd c l os e t r a c i s t s i s ha r dl y l i ke l y t o e nha nc e t he
r e put a t i on of t he P a r l i a m e nt or m a ke i t e a s i e r f or i t t o pl a y a r ol e i n
hol di ng t he E U ’ s pol i c ym a ke r s t o a c c ount .
A nd t he r e i s ye t a not he r , f our t h r e a s on, w hy t he P a r l i a m e nt w i l l ne ve r
be t he a ns w e r t o l e gi t i m a c y a n d de m oc r a c y i n t he e ur o z one . T hi s i s t ha t
de c i s i ons ove r e ur o- z one ba i l – out s , t he r e s c ue of E ur ope a n ba nks or f i s c a l
t r a ns f e r s t o t r oubl e d c ount r i e s w i l l a l w a ys i nvol ve na t i ona l t a xpa ye r s ’
m one y . T he B unde s t a g’ s i ns i s t e nc e on a ppr ovi ng s uc h m e a s ur e s i s not
m a i nl y a s ym pt om of a s ud de n E ur os c e pt i c i s m i n G e r m a ny . I t i s
s om e t hi ng f a r s i m pl e r : t he not i on t ha t , w he r e na t i ona l t a xpa ye r s ’ m one y
( or c r e d i t ) i s be i ng us e d, t he r e m us t be s om e na t i ona l c ont r ol ove r w ha t i t
i s be i ng us e d f o r – a nd a l s o s om e na t i ona l a c c ount a bi l i t y . T he r e i s no w a y
i n w hi c h a E ur ope a n- l e ve l bod y c oul d s uppl y e i t he r of t he s e , l e a s t of a l l
one w hos e r ai s on d’ ê t r e i s a l w a ys t o i nc r e a s e i t s pow e r s a nd t o s pe nd
m or e .
B a c k t o n a t i o n a l d e m o c r a c y
T hi s poi nt s t o a not he r a ns w e r t o E ur ope ’ s de m oc r a t i c de f i c i t : gr e a t e r
na t i ona l i nvol ve m e nt . T he s pr e a d of na t i ona l r e f e r e ndum s on E ur ope a n
i s s ue s i s pa r t of t hi s : be s i de s t h e t w o ha bi t ua l pr a c t i t i one r s , D e nm a r k a nd
I r e l a nd, s e ve r a l ot he r c ount r i e s now put s ubs t a nt i a l ne w E U t r e a t i e s or
de c i s i ons s uc h a s w he t he r t o j oi n t he e ur o t o popul a r vot e . F r a nc e a nd
A us t r i a ha ve , a t va r i ous t i m e s , s ugge s t e d t ha t a de c i s i on t o a dm i t T ur ke y
t o t he E U w oul d ha ve t o be a ppr ove d s i m i l a r l y ( F r a nc e put t he i s s ue of U K
m e m be r s hi p t o a r e f e r e ndum i n 1972, s e c ur i ng a l a r ge “ ye s ” m a j or i t y) .
U nde r i t s E ur ope a n U ni on A c t , t he U K i s r e qui r e d t o put a ny t r e a t y
i nvol vi ng a s i gni f i c a nt t r a ns f e r of pow e r t o B r us s e l s t o a r e f e r e ndum . A nd
D a vi d C a m e r on ha s pr om i s e d t ha t , i f he i s r e – e l e c t e d a s pr i m e m i ni s t e r i n
2015, h e w i l l a s k t he B r i t i s h pe opl e t o de c i de w he t he r t o r e m a i n i n a
r e f or m e d E U .
R e f e r e ndum s a r e , how e ve r , a l w a ys c ha nc y a f f a i r s . S o i t i s r e a l l y
na t i ona l pa r l i a m e nt s t ha t a r e be s t pl a c e d t o i m pr ove de m oc r a t i c i nput a nd

a c c ount a bi l i t y i n t he E U a nd t he e ur o z one . T he i r r ol e i n t he E U m a c hi ne r y
ha s be e n i nc r e a s e d by s uc c e s s i ve t r e a t i e s . S i nc e t he L i s bon t r e a t y , na t i ona l
pa r l i a m e nt s ha v e be e n gi ve n s pe c i f i c pow e r s t o pol i c e “ s ubs i di a r i t y” , t he
pr ovi s i on t ha t de c i s i ons s houl d be t a ke n a t t he l ow e s t pos s i bl e l e ve l .
U nde r a ye l l ow / or a nge – c a r d pr oc e dur e , na t i ona l pa r l i a m e nt s a c t i ng
t oge t he r c a n a s k f or C om m i s s i on pr opos a l s f or l e gi s l a t i on t o be
w i t hdr a w n. T he t r e a t y a l s o r e c ogni s e s C O S A C , a c o- or di na t i ng body of
E ur ope a n c om m i t t e e s f r om na t i ona l pa r l i a m e nt s , m os t of w hi c h m a i nt a i n
of f i c e s i n t he E ur ope a n P a r l i a m e nt bui l di ng i n B r us s e l s . T he r e i s
i nc r e a s i ng i nt e r e s t i n t he m or e e f f e c t i ve f or m s of na t i ona l s c r ut i ny of
E ur ope a n l e gi s l a t i on, w i t h t he m os t popul a r m ode l s be i ng D e nm a r k a nd
F i nl a nd, w he r e pa r l i a m e nt a r y c om m i t t e e s hol d t he gove r nm e nt t o a c c ount
f or de c i s i ons i t t a ke s i n t he C ounc i l of M i ni s t e r s .
T he e ur o c r i s i s ha s put r e ne w e d e m pha s i s on t he r ol e of na t i ona l
pa r l i a m e nt s . T he B unde s t a g, t he E dus kunt a , t he D ut c h T w e e de K a m m e r
a nd ot he r s ha ve a s s e r t e d a di r e c t i nt e r e s t i n a ppr ovi ng a ny de c i s i ons t ha t
r e l y on t he i r t a xpa ye r s ’ c r e di t or m one y . A nd t he ne w pow e r s of t he
C om m i s s i on t o s c r ut i ni s e dr a f t na t i ona l budge t s , t o i s s ue
r e c om m e nda t i ons t o c ount r i e s w i t h e xc e s s i ve budge t de f i c i t s or w i t h l a r ge
c ur r e nt – a c c ount de f i c i t s ( or s ur pl us e s ) a r e i ne vi t a bl y i m pi ngi ng on
na t i ona l pa r l i a m e nt a r y a ut hor i t y ove r publ i c s pe ndi ng a nd t a xa t i on. F or
t hi s r e a s on i t ha s be c om e de s i r a bl e , i nde e d e s s e nt i a l , t ha t t he C om m i s s i on
s houl d e nga ge w i t h na t i ona l pa r l i a m e nt s . S o f a r , i t s r e s pons e t o t he
ye l l ow – c a r d pr oc e dur e ha s be e n di s a ppoi nt i ng: onl y one pr opos a l ha s be e n
w i t hdr a w n, a nd t he C om m i s s i on di s gr a c e f ul l y i gnor e d a c om pl a i nt f r om
18 d i f f e r e nt pa r l i a m e nt a r y c ha m be r s a bout t he l e ga l ba s i s f or a E ur ope a n
publ i c pr os e c ut o r . B ut a s t he s ys t e m be ds dow n, t he C om m i s s i on s houl d
e nd up doi ng m or e a t t he be he s t of na t i ona l pa r l i a m e nt s , a nd i t m us t be
e xpe c t e d t ha t t he c om m i s s i one r f or e c onom i c a nd m one t a r y a f f a i r s a nd hi s
or he r of f i c i a l s w i l l ha ve t o a ppe a r be f or e t he m m or e of t e n.
Y e t e ve n t hi s m i ght not be e nough t o l e nd gr e a t e r de m oc r a t i c
l e gi t i m a c y t o a f a r m or e i nt r us i ve s ys t e m of e c onom i c c ont r ol . T ha t i s w hy
s e ve r a l a na l ys t s a nd c om m e nt a t or s ha ve a t va r i ous t i m e s s ugge s t e d m uc h
gr e a t e r m ove s t ow a r ds f ul l e r po l i t i c a l uni on, w i t h a n e l e c t e d C om m i s s i on
t ha t i nc l ude s a f i na nc e m i ni s t e r , or a t l e a s t a n e l e c t e d pr e s i de nt of t he
C om m i s s i on a n d, a s a ne c e s s a r y a dj unc t , a s ubs t a nt i a l e ur o- z one budge t .

N o doub t i f t he E ur ope a n pr oj e c t w e r e t o t a ke a l e a p i nt o f ul l pol i t i c a l
uni on, s om e ki nd of f e de r a l e l e c t i on w oul d be c om e ne c e s s a r y . B ut a t l e a s t
f or t he f or e s e e a bl e f ut ur e , ne i t he r E ur ope a n vot e r s , nor na t i ona l
gove r nm e nt s , nor E ur ope ’ s pol i t i c a l l e a de r s s e e m r e m ot e l y r e a dy f or a ny
s uc h s t e ps .9

1 0 H o w t h e e u r o s p o i l t a n y o t h e r b u s i n e s s
IT WOULD BE EASY TO FORM THE IMPRESSION t ha t , a t l e a s t s i nc e l a t e 2009,
not hi ng m uc h ha s ha ppe ne d i n t he E ur ope a n U ni on e xc e pt f or t he e ur o
c r i s i s a nd i t s e c onom i c a nd f i na nc i a l r e pe r c us s i ons . Y e t t he nor m a l
bus i ne s s of t he E ur ope a n i ns t i t ut i ons i n s uc h a r e a s a s c om pe t i t i on pol i c y ,
pol i c i ng t he s i ngl e m a r ke t , a gr i c ul t ur e , t r a ns por t , s oc i a l a nd e m pl oym e nt
r e gul a t i on, a nd t r a de ha s pe r f or c e c ont i nue d. T he budge t ha s c ont i nue d t o
be s pe nt a nd, e s pe c i a l l y i n t he ne got i a t i ons f or 2014–20, qua r r e l l e d ove r .
T he E ur ope a n C ounc i l ha s a l s o, f r om t i m e t o t i m e , be e n s um m one d t o
di s c us s m a t t e r s ot he r t ha n t he e c onom y a nd t he e ur o, e ve n i f i t ha s qui c kl y
r e ve r t e d t o t he s e m or e m om e nt ous i s s ue s . T he r e ha s be e n l e s s E U
l e gi s l a t i on t ha n be f or e , i n pa r t b e c a us e gove r nm e nt s ha ve l ong m a de c l e a r
t ha t t he y w a nt e d l e s s . E ve n s o, ove r a l l i t i s unde ni a bl e t ha t t he e ur o c r i s i s
ha s s pi l t da m a gi ngl y i nt o m a ny ot he r a r e a s of E U a c t i vi t y .
O ne e xa m pl e i s c l i m a t e c ha nge , a n i s s ue w he r e t he E ur ope a ns ha ve f or
a l on g t i m e pr i de d t he m s e l ve s o n be i ng i n t he l e a d gl oba l l y . T he E U w a s a
pi one e r not j us t i n s i gni ng t he K yot o pr ot oc ol on c a r bon- di oxi de e m i s s i ons
but a l s o i n s e t t i n g up t he w or l d ’ s f i r s t e m i s s i ons – t r a di ng s c he m e ( E T S ) . I n
2008 i t a dopt e d a “ 20–20–20” s t r a t e gy: s e t t i ng 2020 a s a t a r ge t da t e by
w hi c h a l l E U m e m be r s unde r t ook t o c ut gr e e nhous e – ga s e m i s s i ons by
20% , t o r a i s e t he s ha r e of r e ne w a bl e s i n e ne r gy c ons um pt i on by 20% a nd
t o i m pr o ve e ne r gy e f f i c i e nc y by 20% . Y e t pa r t l y t ha nks t o i t s e c onom i c
w oe s , t he E U ’ s i nf l ue nc e a t t h e 2009 C ope nha ge n e nvi r onm e nt s um m i t ,
a nd a ga i n a t t he 2013 W a r s a w e nvi r onm e nt s um m i t , w a s m i ni m a l . T he
E T S ha s l a r ge l y be e n a f a i l ur e , a s t oo m a ny pe r m i t s w e r e i s s ue d a nd t oo

m a ny i ndus t r i e s e xe m pt e d. C a r bon pr i c e s unde r t he s c he m e ha ve dr oppe d
t oo l ow t o m a ke m uc h di f f e r e nc e .
P opul a r e nt hus i a s m f or c ur bi ng c l i m a t e c ha nge ha s f a de d, e ve n t hough,
t ha nks t o i t s r e c e s s i on, t he E U a s a w hol e w i l l j us t a bout hi t t he 20–20–20
t a r ge t . I n pa r t t he f e e l i ng ha s gr ow n t ha t t he r e i s l i t t l e poi nt i n pur s ui ng
t hi s w i t hout f ur t he r a c t i on by t he U ni t e d S t a t e s a nd C hi na . B ut l os s of
i nt e r e s t i n c l i m a t e c ha nge a l s o r e f l e c t s E ur ope a ns ’ pr e oc c upa t i on w i t h t he
e ur o c r i s i s a nd r i s i ng j obl e s s ne s s , c r e a t i ng a s t r ong de s i r e n ot t o ha r m
c om pe t i t i ve ne s s w i t h t oo m a ny “ gr e e n” t a xe s . A s i t i s , E ur ope a n i ndus t r i e s
pa y f our t i m e s a s m uc h f or ga s a nd t w i c e a s m uc h f or e l e c t r i c i t y a s t he i r
A m e r i c a n r i va l s , w hi c h a r e be ne f i t i ng f r om c he a p s ha l e ga s . I n i t s J a nua r y
2014 pr opos a l s f or ne w c l i m a t e – c ha nge t a r ge t s , t he C om m i s s i on s ugge s t e d
onl y t ha t a l l E U m e m be r s s houl d a i m t o c ut gr e e nhous e – ga s e m i s s i ons by
40% by 2040; i t dr oppe d na t i ona l t a r ge t s f or r e ne w a bl e s , pr opos i ng onl y
t ha t t he E U a s a w hol e s houl d pus h i t s s ha r e up t o 27% o n t he s a m e
t i m e s c a l e .1
E ne r gy pol i c y m or e br oa dl y ha s a l s o s uf f e r e d f r om ne gl e c t , i n pa r t
be c a us e of t he e ur o c r i s i s . I n 2009, s hor t l y be f or e i t br oke , t he E U a dopt e d
a “ t hi r d e ne r gy pa c ka ge ” t ha t e nvi s a ge d a m uc h t oughe r a ppr oa c h t o
l i be r a l i s i ng ga s a nd e l e c t r i c i t y m a r ke t s , i nc l udi ng s e pa r a t i ng pr oduc t i on,
t r a ns m i s s i on a nd s uppl y ( a pr oc e s s know n a s unbundl i ng) . V a r i ous
r e gul a t i ons a nd di r e c t i ve s t o i m pl e m e nt t hi s pa c ka ge ha ve s i nc e be e n
a dopt e d. A nd t he C om m i s s i on ha s a l s o i ni t i a t e d c om pe t i t i on pr oc e e di ngs
a ga i ns t G a z pr om , R us s i a ’ s e ne r gy gi a nt . T he R us s i a ns ha ve be e n l obbyi ng
ha r d f or c ha nge s t o t he t hi r d e ne r gy pa c ka ge . B ut pa r t l y be c a us e E ur ope ’ s
e c onom i c w oe s r a i s e d ne w c onc e r ns a bout hi gh e ne r gy c os t s , pr ogr e s s
t ow a r ds i m pl e m e nt i ng unbundl i ng ha s be e n s l ow or non- e xi s t e nt .
A s i m i l a r s t or y c oul d be t ol d i n m a ny ot he r a r e a s of E U bus i ne s s ,
r a ngi ng f r om t r a ns por t t o a gr i c ul t ur a l t o i ndus t r i a l pol i c y . P a r t l y be c a us e
t he 28 c om m i s s i one r s a l l w a n t t o ha ve s om e t hi ng t o do, t he r e i s no
s hor t a ge of pa pe r s a nd dr a f t pr opos a l s f or l e gi s l a t i on on t he t a bl e . B ut t he
e nt hus i a s m w i t h w hi c h t he y a r e pur s ue d a nd t he a t t e nt i on pa i d t o t he m by
na t i ona l gove r nm e nt s , a nd e s pe c i a l l y by l e a de r s i n t he E ur ope a n C ounc i l ,
ha s of ne c e s s i t y be e n l i m i t e d by t he ne e d t o f oc us on t he i r m or e pr e s s i ng
c onc e r ns f or t he e ur o. I n m a ny c a s e s t hi s ha s m a t t e r e d onl y a l i t t l e . I nde e d,

l e s s r e gu l a t i on i n unne c e s s a r y pl a c e s i s now w i de l y s e e n a s a de s i r a bl e a nd
not a ba d out c om e . B ut i n a f e w a r e a s t he l a c k of a t t e nt i on f r om t he t op
ha s be e n pos i t i ve l y da m a gi ng.
A pr i m e e xa m pl e i s e f f or t s t o s t r e ngt he n a nd c om pl e t e t he s i ngl e
m a r ke t . A f t e r t he 2005 f i a s c o ove r t he “ B ol ke s t e i n” di r e c t i ve t o ope n up
s e r vi c e s m a r ke t s , na m e d a f t e r t he D ut c h c om m i s s i one r t he n i n c ha r ge ,
w hi c h w a s de m oni s e d a s a F r a nke ns t e i n di r e c t i ve i n t he F r e nc h
r e f e r e ndum c a m pa i gn on t he E U c ons t i t ut i on a nd l i nke d t o a s uppos e d
i nf l ux o f P ol i s h pl um be r s , t he e ve nt ua l t e xt w a s m uc h w a t e r e d dow n,
l e a vi ng a s i ngl e m a r ke t i n s e r vi c e s l a r ge l y i nc om pl e t e .2 T he di gi t a l
e c onom y i s a l s o not pr ope r l y c ove r e d by s i ngl e – m a r ke t r ul e s : pr i c e –
c om pa r i s on w e bs i t e s r e m a i n f i e r c e l y na t i ona l , a s do m os t c ons um e r –
pr ot e c t i on l a w s , t a xe s , e l e c t r oni c – w a s t e r ul e s a nd pos t a l s ys t e m s . T he
r e s ul t i s t ha t e – c om m e r c e , w hi c h ha s m us hr oom e d i n t he U ni t e d S t a t e s a nd
i n s e ve r a l i ndi vi dua l E ur ope a n c ount r i e s , i s not a bl y unde ve l ope d a c r os s
E ur ope a n bor de r s .
Y e t ove r t he pa s t f e w ye a r s m o s t t a l k of e xt e ndi ng t he s i ngl e m a r ke t ,
of t e n pr om ot e d by l i be r a l c ou nt r i e s l i ke t he U K a nd S w e de n, ha s be e n
dr ow ne d out by f e a r s a s s oc i a t e d w i t h r e c e s s i on a nd r i s i ng une m pl oym e nt .
T he f a t e of M a r i o M ont i ’ s 2010 r e por t , A N e w St r at e gy f or t he Si ngl e
M ar k e t , i s pa r t i c ul a r l y i ns t r uc t i ve .3 T he r e por t w a s c om m i s s i one d by J os é
M a nue l B a r r os o, t he E ur ope a n C om m i s s i on pr e s i de nt , l ong be f or e M ont i
be c a m e I t a l i a n pr i m e m i ni s t e r , w he n he w a s t hought of a s j us t a not he r
f or m e r c om m i s s i one r . I n t he r e por t , M ont i pr opos e d f ur t he r w or k t o
c om pl e t e t he s i ngl e m a r ke t i n e ne r gy , di gi t a l a nd s e r vi c e s , a nd a l s o
s ugge s t e d w a ys t o bol s t e r t he gr e e n e c onom y a nd t o i m pr ove f r e e
m ove m e nt of pe opl e a nd c a pi t a l ( i nc l udi ng s om e e l e m e nt s of t a x
ha r m oni s a t i on) .
B y a c r u e l i r ony , how e ve r , t he r e por t w a s publ i s he d on t he s a m e da y a s
t he G r e e k ba i l – out w a s a gr e e d. T he E ur ope a n C ounc i l ha d e a r l i e r i n t he
s a m e ye a r pr opos e d a ne w E U 2020 s t r a t e gy t o f ol l ow f r om t he e a r l i e r
L i s bon s t r a t e gy , w hi c h w a s m e a nt t o c r e a t e t he w or l d’ s “ m os t c om pe t i t i ve
a nd dyna m i c know l e dge – ba s e d e c onom y” by 2010. B ut , j us t a s t he L i s bon
s t r a t e gy ha d ne ve r r e a l l y be e n i m pl e m e nt e d, pa r t l y be c a us e ne i t he r F r a nc e
nor G e r m a ny s e e m e d t o be l i e ve i n i t , s o t he E U 2020 s t r a t e g y s e e m s t o

ha ve be e n qui e t l y a ba ndone d. T he E ur ope a n C ounc i l dul y e ndor s e d t he
M ont i r e por t , b ut l i t t l e m or e w a s done t o pur s ue i t . M ont i hi m s e l f ha s
gone f ur t he r : he ha s w a r ne d t ha t be c a us e of t he e ur o c r i s i s , r e pa t r i a t i on of
ba nk l e ndi ng, di f f e r e nt i nt e r e s t r a t e s r ound E ur ope a nd r i s i ng pr ot e c t i oni s t
pr e s s ur e s , t he r e i s a r e a l r i s k t ha t t he s i ngl e m a r ke t c oul d go t hr ough a
pe r i od of “ r ol l ba c k a nd e ve n di s i nt e gr a t i on” .4
T h e p r i c e o f i n a c t i o n
O ne c oul d r un t hr ough a l m os t a ny a r e a of E U bus i ne s s i n t he pa s t f i ve
ye a r s a n d r e a c h s i m i l a r c onc l us i ons . N or m a l a c t i vi t y ha s c ont i nue d a nd
t he r e ha ve e ve n be e n s om e no t e w or t hy pol i c y s uc c e s s e s , f or e xa m pl e i n
r e f or m i ng t he c om m on f i s he r i e s pol i c y t o e nd t he pr a c t i c e of di s c a r di ng
c a t c he s . B ut t i m e a nd a ga i n w o r k ha s s t a l l e d a s c om m i s s i one r s , of f i c i a l s
a nd na t i ona l m i ni s t e r s ha ve be e n s i de t r a c ke d i nt o e f f or t s t o r e s ol ve t he
e ur o c r i s i s . T he s i ngl e m a r ke t r e m a i ns i nc om pl e t e , pa r t l y be c a us e t he
a t t e nt i on of t he c om m i s s i one r c onc e r ne d, M i c he l B a r ni e r , ha s be e n
f oc us e d m a i nl y on ba nk a nd f i na nc i a l r e gul a t i on. A l t hough a l m os t a l l
gove r nm e nt s h a ve c a l l e d f or l e s s a s w e l l a s be t t e r r e gu l a t i on, t he
C om m i s s i on’ s s a us a ge m a c hi ne ha s c ont i nue d t o c hur n out unw a nt e d
r ul e s . T r a de p ol i c y ha s be e n a c t i ve , w i t h s e ve r a l f r e e – t r a de de a l s
ne got i a t e d or i n t he pi pe l i ne . B ut t he i nvol ve m e nt of E U l e a de r s ha s be e n
not i c e a bl e m a i nl y by i t s a bs e nc e .
T he de c i s i on i n 2013 t o l a unc h t a l ks t ow a r ds a T r a ns a t l a nt i c T r a de a nd
I nve s t m e nt P a r t ne r s hi p ( T T I P ) w a s dr i ve n i n l a r ge pa r t by t he E ur ope a ns ,
w ho w e r e m a i nl y c onc e r ne d not t o l os e out f r om B a r a c k O ba m a ’ s ne w
f oc us on A s i a . B ut t he w or r y i s t ha t c onc e r ns a bout E ur ope ’ s e c onom i e s ,
hi gh un e m pl oym e nt a nd t he f ut ur e of t he s i ngl e c ur r e nc y m a y w e l l
c ont i nue t o di ve r t pol i t i c a l a nd m e di a a t t e nt i on a w a y f r om t he i m por t a nt
de t a i l s i n t he T T I P . A l l t r a de t a l ks r un i nt o t r oubl e , w i t h s pe c i a l i nt e r e s t s
s he l t e r i ng s uc h t hi ngs a s a gr i c u l t ur e , a udi o- vi s ua l s e r vi c e s , r ul e s on publ i c
pr oc ur e m e nt , a nd f ood a nd ve t e r i na r y s t a nda r ds . A l r e a dy t he r e a r e s i gns of
e m e r gi ng doubt s a bout t he T T I P ’ s c ha nc e s on t he E ur ope a n s i de . O n t he
A m e r i c a n s i de , t he U S C ongr e s s ha s not e ve n gi ve n O ba m a t he t r a de
pr om ot i on a ut hor i t y t ha t he ne e ds t o pa s s a de a l . T he W or l d T r a de
O r ga ni s a t i on’ s D oha r ound l a r ge l y f e l l a pa r t , w i t h w ha t w a s e ve nt ua l l y

e na c t e d be i ng m or e of a m ous e t ha n a n e l e pha nt – t hough t ha t w a s m a i nl y
be c a us e of obj e c t i ons f r om e m e r gi ng c ount r i e s l i ke I ndi a , not be c a us e of
t he E ur ope a ns . T he r e i s e ve r y c ha nc e t ha t t he s a m e c oul d ha ppe n w i t h t he
T T I P .
T ha t w o ul d be a doubl e m i s s e d oppor t uni t y , f or a s w e l l a s boos t i ng
e c onom i c gr ow t h, t he T T I P c ou l d be t he l a s t c ha nc e t ha t E ur ope a nd t he
U ni t e d S t a t e s w i l l ge t t o s e t s t a nda r ds a nd r ul e s f or w or l d t r a de be f or e a
ne w l y pow e r f ul C hi na e xe r t s i t s i nf l ue nc e . A nd ye t , e ve n be f o r e t he t a l ks
be ga n, t he F r e nc h m a na ge d t o bl oc k a ny di s c us s i on of t he i r not or i ous
c ul t ur a l e xc e pt i on, unde r w hi c h pr ot e c t i on of a udi o- vi s ua l pr oduc t s s uc h
a s f i l m s i s a l l ow e d de s pi t e f r e e – t r a de r ul e s . T r a ns a t l a nt i c di f f e r e nc e s ove r
t e l e c om s , i nt e r n e t a nd ba nk r e gul a t i on, a nd ove r t he r ul e s gove r ni ng
a i r l i ne s a nd s hi ppi ng, r e m a i n w i de . P hyt os a ni t a r y r ul e s on t he us e of
hor m one s i n m e a t or f or ge ne t i c a l l y m odi f i e d c r ops a r e a l s o pot e nt i a l
s t um bl i ng bl oc ks . W i t h t he e ur o c ont i nui ng t o di ve r t e ve r ybody’ s
a t t e nt i on, E ur o pe a n e l e c t i ons a nd t he c hoi c e of a ne w C om m i s s i on
a ppr oa c hi ng, a nd O ba m a s t i l l de ni e d f a s t – t r a c k a ut hor i t y by C ongr e s s , t he
c ha nc e s of a s u c c e s s f ul out c om e t o t he T T I P t a l ks do not l ook a l l t ha t
hi gh.
A l a s t a r e a w he r e t he E U ha s m a na ge d l e s s t ha n i t m i ght ha ve done
ove r t he pa s t f i ve ye a r s i s j u s t i c e a nd hom e a f f a i r s ( J H A ) . U nde r t he
L i s bon t r e a t y , m os t a c t i vi t y i n J H A ha s m ove d f r om be i ng done i nt e r –
gove r nm e nt a l l y a nd by una ni m i t y t o be i ng c a r r i e d out by t he c om m uni t y
m e t hod, a nd t hus s ubj e c t t o qua l i f i e d- m a j or i t y vot i ng a nd c o- de c i s i on w i t h
t he E ur ope a n P a r l i a m e nt . V i vi a ne R e di ng, t he j us t i c e c om m i s s i one r , ha s
pr oduc e d a num be r of pr opo s a l s , s uc h a s a r e vi s e d E ur o pe a n a r r e s t
w a r r a nt , a E ur ope a n publ i c pr os e c ut or ’ s of f i c e , ne w e xt r a di t i on
a r r a nge m e nt s , a nd c om m on i m m i gr a t i on a nd a s yl um r ul e s . Y e t f e w of
t he s e ha ve m a de m uc h pr ogr e s s , not onl y be c a us e t he U K , D e nm a r k a nd
I r e l a nd h a ve opt – out s ( a nd t he U K i s opt i ng out e n bl oc f r om a l l J H A r ul e s
i n 2014) , but a l s o be c a us e of t he ge ne r a l di s t r a c t i on of t he e ur o c r i s i s .5
T he ot he r r e a s on J H A ha s pr ove d di s a ppoi nt i ng i s t ha t i m m i gr a t i on ha s
s udde nl y be c om e s uc h a t oxi c i s s ue i n m a ny c ount r i e s . T he r i s e of popul i s t
pa r t i e s ha s be e n dr i ve n i n m a ny c a s e s by i nc r e a s i ng vot e r hos t i l i t y t o
i m m i gr a t i on, e ve n w i t hi n t he E U . T he be l i e f t ha t m i gr a nt s f r om c e nt r a l

a nd e a s t e r n E ur ope a r e t a ki ng j obs or c l a i m i ng ge ne r ous w e l f a r e be ne f i t s
ha s be c om e w i de s pr e a d. T he B r i t i s h, D ut c h a nd G e r m a ns a r e a l l t a l ki ng of
i nt r oduc i ng ne w r ul e s t o s t op “ be ne f i t t our i s m ” . O pi ni on pol l s t e r s ha ve
f ound t h a t by f a r t he bi gge s t r e a s on B r i t i s h vot e r s gi ve f or ba c k i ng t he U K
I nde pe nde nc e P a r t y i s not i t s a nt i – E U pol i c y but i t s a nt i – i m m i gr a t i on one .
S om e pol i t i c a l l e a de r s , i nc l udi ng t he U K ’ s D a vi d C a m e r on, ha ve
que s t i one d t he pr i nc i pl e of f r e e m ove m e nt of l a bour w i t hi n t he E U , on t he
gr ounds t ha t w he n i t w a s e ns hr i ne d nobody e xpe c t e d t he c l ub t o i nc l ude
s uc h r e l a t i ve l y l ow – i nc om e c ount r i e s a s R om a ni a a nd B ul ga r i a . C a m e r on
ha s s ugge s t e d t ha t a ny f ut ur e e nl a r ge m e nt t o t a ke i n ne w c oun t r i e s m i ght
ha ve t o be a c c om pa ni e d by p e r m a ne nt c ont r ol s on f r e e m ove m e nt of
pe opl e – a n i r ony gi ve n t ha t t he U K ha s t r a di t i ona l l y be e n t he s t r onge s t
s uppor t e r of E U e xpa ns i on t o a dm i t ne w m e m be r s . T he S w i s s vot e i n
F e br ua r y 2014 t o put quot a s on i m m i gr a t i on e ve n f r om w i t hi n t he E U w a s
not j us t a br e a c h of S w i t z e r l a n d’ s va r i ous a gr e e m e nt s w i t h t he E U t ha t
c oul d t hr e a t e n t he c ount r y’ s a c c e s s t o t he s i ngl e m a r ke t ; i t w a s a l s o a
ha r bi nge r of s i m i l a r t hi nki ng w i t hi n t he E U i t s e l f .
A C o m m i s s i o n o f n e g l e c t
T he e ur o c r i s i s ha s , i n s hor t , m a na ge d t o di s t r a c t a t t e nt i on f r om m uc h of
t he r e s t of t he a ge nda of t he C om m i s s i on, na t i ona l gove r nm e nt s a nd t he
E ur ope a n P a r l i a m e nt s i nc e 2009. E c onom i c di f f i c ul t i e s ha ve i ne vi t a bl y
s a ppe d t he E ur ope a n U ni on of m uc h of i t s br oa de r i nf l ue nc e i n t he w or l d.
A nd be c a us e E ur ope ’ s pol i t i c a l l e a de r s ha ve s pe nt s o m uc h t i m e t r yi ng t o
r e pa i r t h e de f e c t s i n t he i r s i ngl e c ur r e nc y , t he y ha ve de vot e d m uc h l e s s
a t t e nt i on t o c ons i de r i ng t he f ut ur e s ha pe a nd di r e c t i on of t he E U . A s t he
i m m e di a t e w or r y t ha t t he e ur o m i ght c ol l a ps e di s s i pa t e s a nd w i t h t he
pr os pe c t of a ne w C om m i s s i on a nd ne w E ur ope a n P a r l i a m e nt j us t a he a d,
B r us s e l s i s l e f t w i t h a E ur ope a n pr oj e c t t ha t i s i t s e l f i n s om e da nge r of
f a l l i ng a pa r t due t o pol i t i c a l ne gl e c t .
S om e ha ve s ugge s t e d t ha t a good pl a c e t o s t a r t i m pr ovi ng t hi ngs m i ght
be w i t h t he C om m i s s i on i t s e l f . I n t he U K a nd m a ny nor t he r n c o unt r i e s , t he
not i on t ha t t he C om m i s s i on s houl d be doi ng l e s s but a l s o doi ng i t be t t e r i s
w i de l y s ha r e d: e ve n B a r r os o ha s e xpr e s s e d a s i m i l a r w i s h. T he D ut c h a nd
G e r m a ns ha ve be e n e s pe c i a l l y voc i f e r ous i n de m a ndi ng l e s s r e d t a pe a nd

bur e a uc r a c y , a nd m or e a t t e nt i o n t o t he pr i nc i pl e of s ubs i di a r i t y , w hi c h
pr ovi de s t ha t a c t i on s houl d be t a ke n a t E ur ope a n l e ve l onl y i f i t i s m or e
e f f i c a c i ous t ha n a c t i ng a t na t i ona l l e ve l . B ut e ve n a c r os s s out he r n E ur ope ,
t he f e e l i ng t ha t s om e t i m e s t he C om m i s s i on a nd t he E ur ope a n P a r l i a m e nt
a r e t oo i nt r us i ve ha s s pr e a d.
O ne r e a s on t he C om m i s s i on ha s t r a di t i ona l l y f ound i t ha r d t o r e s pond
t o c a l l s f or i t t o do l e s s i s t ha t t he r e a r e t oo m a ny c om m i s s i one r s . T he r e i s
a w i de s pr e a d c ons e ns us t ha t 28 i s t oo bi g a num be r f or t he c ol l e ge . N ot
s ur pr i s i ngl y , e a c h c om m i s s i one r w a nt s t o m a ke hi s or he r m a r k w i t h
l e gi s l a t i on. W or s e , pa r t l y be c a us e t he C om m i s s i on doe s not a c t l i ke a
gove r nm e nt , t he r e i s no r e a l s ys t e m f or c o- or di na t i ng a nd pr i or i t i s i ng i t s
a c t i ons . I ns t e a d, t he C om m i s s i on ope r a t e s i n a s i l o- l i ke w a y , w i t h
i ndi vi dua l di r e c t or a t e s ope r a t i ng l a r ge l y w i t hout m uc h r e f e r e nc e t o e a c h
ot he r or t o t he p r e s i de nt . T he pr opos a l i n t he c ons t i t ut i ona l t r e a t y a nd t he n
t he L i s b on t r e a t y t ha t t he r e s houl d be f e w e r c om m i s s i one r s t h a n one pe r
c ount r y w a s qui e t l y s he l ve d a s a ge s t ur e t o s e c ur e I r i s h a ppr ova l of t he
t r e a t y t he s e c ond t i m e r ound. A t l e a s t s om e gove r nm e nt s w o ul d l i ke t o
f i nd a w a y t o r e vi ve i t s s pi r i t , pe r ha ps by c r e a t i ng s e ni or a nd j uni or
c om m i s s i one r s .

1 1 E u r o p e ’ s p l a c e i n t h e w o r l d
THE EUROPEAN UNION’S HOPES t ha t t he L i s bon t r e a t y w oul d e na bl e i t t o
pl a y a bi gge r gl oba l pol i t i c a l r ol e t o m a t c h i t s e c onom i c w e i ght w e r e de a l t
a c r ue l bl ow by t he ons e t of t he e ur o c r i s i s . T ha t t he G r e e k pr obl e m
s ur f a c e d j us t a s E U l e a de r s w e r e a bout t o pi c k a ne w f or e i gn- pol i c y bos s
w a s e s pe c i a l l y ga l l i ng. O ve r t he pa s t f e w ye a r s E U f or e i gn pol i c y ha s
s uf f e r e d not j us t be c a us e t he e ur o c r i s i s ha s be e n a di s t r a c t i on, but a l s o
be c a us e i t ha s e a t e n a w a y a t t he r e s pe c t t ha t t he r e s t of t he w or l d
pr e vi ous l y ha d f or a E ur ope t h a t ha d l ong be e n c ons i de r e d a n e c onom i c
gi a nt but a pol i t i c a l pygm y .
T he M a a s t r i c ht t r e a t y i n 1992, bui l di ng on a r r a nge m e nt s pr e vi ous l y
know n a s E ur ope a n P ol i t i c a l C o- ope r a t i on, e s t a bl i s he d a E ur ope a n
C om m on F or e i gn a nd S e c ur i t y P ol i c y ( C F S P ) a s w ha t w a s t he n c a l l e d t he
E U ’ s “ s e c ond pi l l a r ” , t o be ope r a t e d i ni t i a l l y on a n i nt e r go ve r nm e nt a l
ba s i s . S uc c e s s i ve t r e a t i e s e xpa nde d t he s c ope a nd r ol e of t he C F S P , w hi c h
w a s l a t e r br ought unde r t he nor m a l c om m uni t y r ul e s , t hough a l w a ys
s ubj e c t t o una ni m ous not m a j or i t y vot i ng. T he 2009 L i s bon t r e a t y t he n
c r e a t e d t he pos t of hi gh r e pr e s e nt a t i ve f or f or e i gn a nd s e c ur i t y pol i c y , t o
be i n c ha r ge of a ne w E ur ope a n E xt e r na l A c t i on S e r vi c e ( E E A S ) . T hi s
f or m a l i s e d a j ob t ha t w a s pr e vi ous l y oc c upi e d by S pa i n’ s J a vi e r S ol a na , a
f or m e r s e c r e t a r y- ge ne r a l of t he N or t h A t l a nt i c T r e a t y O r ga ni s a t i on
( N A T O ) .
Y e t f or a l l t he a s pi r a t i ons of t he t r e a t i e s a nd de s pi t e t he c r e a t i on of
ne w i ns t i t ut i ons , i t ha s a l w a ys be e n ha r d t o s e c ur e t he c ons e nt of m e m be r
c ount r i e s t o a ge nui ne c om m on f or e i gn pol i c y . T he m a i n pr obl e m ha s be e n

w i t h t he l a r ge r m e m be r s , not a bl y t he U K a nd F r a nc e , w hi c h c ont i nue t o
s e e t he m s e l ve s a s ha vi ng a gl oba l r ol e of t he i r ow n. B ot h a r e nuc l e a r
pow e r s , a s w e l l a s pe r m a ne nt m e m be r s of t he U N S e c u r i t y C ounc i l . T he
U K , i n pa r t i c ul a r , ha s of t e n f r u s t r a t e d hope s of t he E U pl a yi ng a bi gge r
s e c ur i t y or de f e nc e r ol e , f or i ns t a nc e bl oc ki ng a ny s ugge s t i on o f s e t t i ng up
a n E U m i l i t a r y he a dqua r t e r s . A l t hough F r a nc e unde r S a r koz y r e j oi ne d
N A T O ’ s m i l i t a r y s t r uc t ur e a n d ha s e m ba r ke d on di r e c t m i l i t a r y c o-
ope r a t i on w i t h t he U K , i t t oo ha s c ont i nue d t o a s pi r e t o a gl oba l r ol e of i t s
ow n, e s pe c i a l l y i n A f r i c a .
B ut i t ha s of t e n be e n a l m os t a s di f f i c ul t t o f i nd una ni m ous a gr e e m e nt
a m ong ot he r c ount r i e s . E ve n a s M a a s t r i c ht w a s be i ng ne g ot i a t e d a nd
r a t i f i e d, f or e xa m pl e , t he out br e a k of w a r i n t he B a l ka ns pr ovi de d a f i r s t
bi g t e s t t ha t E ur ope l a r ge l y f a i l e d. I t w a s t he G e r m a ns w ho i ns i s t e d i n
1991 on t he e a r l y r e c ogni t i on of C r oa t i a , f ol l ow e d by ot he r e x-
Y ugos l a vi a n s t a t e s ; a nd i t w a s J a c que s P oos , t he f or e i gn m i ni s t e r of
L uxe m bour g, w ho pr oc l a i m e d t hi s t o be “ t he hour of E u r ope ” .1 Y e t
s ubs e que nt l y t he E ur ope a ns c oul d not a gr e e on w he t he r or w he n t o
i nt e r ve ne i n t he i r ow n ba c kya r d, a nd i t t ook t he A m e r i c a ns t o knoc k he a ds
t oge t he r a nd s e c ur e t he D a yt on a gr e e m e nt i n 1995 t ha t s t oppe d m os t of t he
f i ght i ng i n B os ni a .
A l t hough i n s ubs e que nt ye a r s t he r e w e r e m or e s uc c e s s f ul e f f or t s t o
f i nd c on s e ns us w i t hi n t he E U on s m a l l e r f or e i gn- pol i c y i s s ue s , i t ha s of t e n
pr ove d i m pos s i bl e on l a r ge r one s . T he r e ha ve be e n bi g di f f e r e nc e s a m ong
t he l a r ge r E U c ount r i e s on pol i c y t ow a r ds R us s i a , f or i ns t a nc e , w hi c h t he
R us s i a ns unde r V l a di m i r P ut i n ha ve gl e e f ul l y e xpl oi t e d. A nd, a s t he
B a l ka ns s how e d, w he n i t c om e s t o w a r , t he E ur ope a ns ha ve m or e of t e n
be e n di vi de d t ha n uni t e d. M os t obvi ous l y , t he E U s pl i t ove r I r a q i n 2003,
w i t h G e r m a ny a nd F r a nc e j oi ni ng R us s i a i n oppos i ng t he w a r , w hi l e t he
U K , I t a l y , S pa i n a nd s e ve r a l c ount r i e s f r om e a s t e r n E ur ope s uppor t e d i t
( t hi s w a s t he t i m e w he n t h e A m e r i c a n de f e nc e s e c r e t a r y , D ona l d
R um s f e l d, s pok e of t he r e be i ng a ne w a nd a n ol d E ur ope ) . A m or e r e c e nt
e xa m pl e of di vi s i on c a m e ove r t he 2011 w a r i n L i bya , w hi c h w a s
pr os e c ut e d vi gor ous l y by t he U K a nd F r a nc e but oppos e d by G e r m a ny .
F o r e i g n p o l i c y b l u e s

T he E U ’ s a s pi r a t i ons t o bui l d a s t r onge r a nd m or e c ohe s i ve f or e i gn pol i c y
t o i n c r e a s e i t s i nf l ue nc e i n t he w or l d w e r e ne ve r l i ke l y t o be a l l t ha t
s uc c e s s f ul . B ut t he y ha ve t a ke n a f ur t he r knoc k be c a us e of t h e e u r o c r i s i s .
B y a n unf or t una t e c oi nc i de n c e , t he c hoi c e of t he f i r s t ne w hi gh
r e pr e s e nt a t i ve c a m e a t t he s a m e t i m e . T he ba r ga i ni ng ove r na m e s f or j obs
w a s , a s us ua l , a s ha m bl e s , w i t h t he U K ’ s pr i m e m i ni s t e r , G or don B r ow n,
f i r s t t r yi ng t o pus h D a vi d M i l i ba nd, t he f or e i gn s e c r e t a r y , i nt o t he j ob. I n
t he e nd M i l i ba nd r e j e c t e d i t a nd t he pos t w e nt i ns t e a d t o t he l i t t l e – know n
C a t he r i ne A s ht on, a f or m e r t r a de c om m i s s i one r w hos e pr e vi ous publ i c –
pol i c y l i f e w a s l i m i t e d t o r unni ng a he a l t h a ut hor i t y a nd s e r vi ng i n t he
U K ’ s H ous e of L or ds , a nd w ho ha d l i m i t e d know l e dge of or e xpe r i e nc e i n
f or e i gn a f f a i r s .
P r e di c t a bl y , t he e s t a bl i s hm e nt of t he ne w E E A S a nd t he e xpe r i m e nt
w i t h A s ht on a s a m or e pow e r f ul E U hi gh r e pr e s e nt a t i ve ha ve bot h be e n
di s a ppoi nt i ng. A pa r t f r om he r ow n l i m i t a t i ons , t he j ob ha s be c om e a l m os t
t oo b i g f or one pe r s on t o do. A s w e l l a s be i ng hi gh r e pr e s e nt a t i ve , s he i s a
vi c e – pr e s i de nt of t he C om m i s s i on, s he c ha i r s t he F or e i gn A f f a i r s C ounc i l
a nd s he i s a gu a r di a n of B r i t i s h i nt e r e s t s i n B r us s e l s . S he w a s not gi ve n
a ny de put i e s , e ve n t hough t he e xi ge nc i e s of t he j ob of t e n r e qui r e he r t o be
i n t w o pl a c e s a t onc e . E ve r yt hi ng ha s t a ke n l onge r t ha n e xpe c t e d a nd
A s ht on ha s c ont i nue d t o be o ve r s ha dow e d not j us t by na t i ona l f or e i gn
m i ni s t e r s but a l s o by J os é M a nue l B a r r os o, pr e s i de nt of t he E ur ope a n
C om m i s s i on, a nd H e r m a n V a n R om puy , t he f i r s t pe r m a ne nt pr e s i de nt of
t he E ur ope a n C ounc i l . T he C F S P w a s s uppos e d t o s ha r pe n t he w a y t he E U
r e pr e s e nt e d i t s e l f i n t he w or l d, but t he r e s ul t s ha ve f r e que nt l y s e e m e d t o
do t he oppos i t e : bot h pr e s i de nt s a s w e l l a s A s ht on a t t e nd bi l a t e r a l s um m i t s
w i t h t he A m e r i c a ns , R us s i a ns a nd C hi ne s e , f or e xa m pl e . A nd t he E U ha s
c ont i nue d t o f i e l d t oo m a ny a s s or t e d l e a de r s a t G 8 a nd G 20 s um m i t
m e e t i ngs .
E ve n s o , ove r t he pa s t ye a r , A s ht on ha s r e c or de d s om e not a bl e
s uc c e s s e s . T he s e i nc l ude a gr oundbr e a ki ng de a l be t w e e n S e r bi a a nd
K os ovo t ha t ha s e na bl e d t he f i r s t t o ope n m e m be r s hi p ne got i a t i ons a nd t he
s e c ond t o be gi ve n a m e m be r s hi p pe r s pe c t i ve , a he a d of B os ni a . A s ht on ha s
a l s o be e n a ke y m e m be r of t he t e a m ne got i a t i ng a t e nt a t i ve n uc l e a r de a l
w i t h I r a n, w hi c h w a s i n pa r t he r ow n pe r s ona l a c hi e ve m e n t . S he ha s
be c om e a n i ndi s pe ns a bl e pa r t ne r of s uc c e s s i ve A m e r i c a n s e c r e t a r i e s of

s t a t e , f i r s t H i l l a r y C l i nt on a nd l a t e r J ohn K e r r y , w i t h w hom s he ha s f a r
m or e c o nt a c t t ha n m os t E ur ope a n f or e i gn m i ni s t e r s e ve r do. S he w a s t he
onl y di pl om a t i c l e a de r t o m e e t t he de pos e d E gypt i a n pr e s i de nt ,
M uha m m a d M o r s i , a f t e r hi s i m pr i s onm e nt . A nd s he ha s pl a ye d a l e a di ng
r ol e i n ne got i a t i ons t o e nd t he w a r i n S yr i a . Y e t de s pi t e a l l t he s e
a c hi e ve m e nt s , t he ove r a l l r e c or d of t he E U i n f or e i gn pol i c y ha s not be e n a
s t r ong one – a nd pa r t of t he r e a s on f or t hi s ha s be e n t he E U ’ s poor
e c onom i c pe r f o r m a nc e a nd t he di s t r a c t i on of t he e ur o c r i s i s , w hi c h ha s
r e duc e d E ur ope ’ s ove r a l l i nf l ue nc e .2
A f ur t he r c ons e que nc e of t ha t c r i s i s ha s be e n t ha t de f e nc e budge t s
a c r os s E ur ope , a l r e a dy s t r a i ne d, ha ve be e n f ur t he r c ut . I n 2009 a E ur ope a n
C ounc i l s um m i t a gr e e d t o s t e p up E ur ope ’ s m i l i t a r y a m bi t i ons , w i t h s om e
t a l k of be i ng a bl e t o de pl oy 60 ,000 t r oops w i t hi n 60 da ys . B ut f i ve ye a r s
on l i t t l e ha s c om e of t hi s . T h e E U i s m e a nt t o ha ve t w o 1,500- s t r ong
ba t t l e gr oups a va i l a bl e a t s hor t not i c e , but none ha s e ve r be e n us e d.
O ve r a l l , E U c ount r i e s s pe nd l e s s t ha n 1.5% of G D P on de f e nc e , f a r be l ow
bot h t he a gr e e d N A T O t a r ge t o f 2% a nd t he 4% – pl us s pe nt by t he U ni t e d
S t a t e s . D e f e nc e s pe ndi ng ha s s hr unk a s a s ha r e of publ i c s pe ndi ng. A nd t he
m one y i s not s pe nt a s e f f e c t i ve l y a s i t c oul d be w e r e t he r e t o be m or e
c ol l a bor a t i on a c r os s bor de r s .3 S uc c e s s i ve A m e r i c a n de f e nc e s e c r e t a r i e s
ha ve c ont i nue d t o voi c e f r us t r a t i on a s E ur ope ha s be c om e i n t he i r e ye s
m or e of a c ons um e r t ha n a pr ovi de r of s e c ur i t y , a gr ow i ng pr obl e m a s t he
A m e r i c a ns pi vot t he i r a t t e nt i on t ow a r ds A s i a .
T he e xp e r i e nc e w i t h t he ons e t of t he A r a b s pr i ng i n J a nua r y 2011,
w hi c h c oi nc i de d w i t h one of t he w or s t m om e nt s of t he e ur o c r i s i s , w a s
i l l um i na t i ng. T h e E ur ope a ns , l i ke t he A m e r i c a ns , w e r e t a ke n by s ur pr i s e
by t he s udde n ups ur ge of pe opl e pow e r , f i r s t i n T uni s i a a nd t he n i n E gypt .
T he s ub s e que nt de c i s i on t o i nt e r ve ne i n L i bya t o s t op a pos s i bl e m a s s a c r e
i n B e ngha z i by t r oops l oya l t o M ua m m a r Q a dda f i w a s t a ke n by t he B r i t i s h
a nd F r e nc h gove r nm e nt s , w i t h t he G e r m a ns a ga i ns t ( i nde e d, G e r m a ny
c hos e t o a bs t a i n i n t he vot e i n t he U N S e c ur i t y C ounc i l , of w hi c h i t w a s a
t e m por a r y m e m be r ) . B ut a f t e r onl y a f e w da ys t he t w o bi gge s t E ur ope a n
m i l i t a r y pow e r s w e r e f or c e d t o c a l l f or m or e A m e r i c a n he l p, i nc l udi ng t he
pr ovi s i on of dr one s , a i r – t o- a i r r e f ue l l i ng a nd s t oc ks of s m a r t bom bs .4
L a t e r , E U m e m be r s w e r e di vi de d ove r w he t he r a nd how t o i nt e r ve ne i n

S yr i a , w i t h t he U K a nd F r a nc e s how i ng m os t i nt e r e s t i n a r m i ng t he r e be l s
a ga i ns t t he A s s a d r e gi m e , but G e r m a ny a nd ot he r s be i ng br oa dl y a ga i ns t
( t hough t he A ugus t 2013 vot e of t he U K H ous e of C om m ons a ga i ns t
i nt e r ve nt i on i n S yr i a ha s c ur be d B r i t i s h e nt hus i a s m f or a ny m i l i t a r y
a dve nt ur e s ) .
I n e c onom i c t e r m s , t he E U ha s a l s o s how n i t s e l f una bl e a l w a ys t o w or k
out t he m os t s e ns i bl e r e s pons e t o t he A r a b s pr i ng. G r a nd t a l k by t he
C om m i s s i on a nd t he E E A S of t he t hr e e M s – m one y , m a r ke t s a nd
m i gr a t i on – ha s a l l t oo of t e n r u n i nt o t he s a nd. P a r t l y be c a us e of t he e ur o
c r i s i s , t he r e w a s ne ve r m uc h on of f e r t o s uppor t a pol i c y t ha t be c a m e
know n a s “ m or e f or m or e ” : t h e m or e A r a b c ount r i e s de m oc r a t i s e d, t he
m or e t h e E U w oul d he l p t he m . M one y w a s s hor t . F ul l e r m a r ke t a c c e s s ,
pa r t i c ul a r l y f or a gr i c ul t ur a l pr o duc t s , ha s a l s o be e n not a bl e l a r ge l y by i t s
a bs e nc e : t hr e e ye a r s a f t e r t he A r a b s pr i ng be ga n, onl y M or oc c o ha s e ve n
be gun ne got i a t i ons on a de e p f r e e – t r a de de a l w i t h t he E U .
A s f or m i gr a t i on, hos t i l i t y t ow a r ds i t ha s gr ow n a s t he e ur o c r i s i s ha s
l e d t o r i s i ng une m pl oym e nt , e s pe c i a l l y i n t he s out he r n M e di t e r r a ne a n
c ount r i e s . F a r f r om pr ovi di ng m or e r out e s t o l e ga l m i gr a t i on, e ve r m or e
r e s our c e s ha ve be e n pour e d i nt o t i ght e ni ng c ont r ol s on i l l e ga l
i m m i gr a t i on. L e a ky boa t s c a r r yi ng w oul d- be i m m i gr a nt s c ont i nue t o s i nk
i n t he M e di t e r r a ne a n a r ound t he I t a l i a n i s l a nd of L a m pe dus a , one of t he
ne a r e s t pa r t s of t he E U t o nor t h A f r i c a . O ve r m i gr a t i on, i nde e d, t he E U
now s t a nds t ow a r ds nor t h A f r i c a r a t he r a s t he U ni t e d S t a t e s s t a nds t ow a r ds
M e xi c o – a nd a pa r t of t he r e a s on f or t hi s i s t he di r e e c onom i c
c ons e que nc e s of t he e ur o c r i s i s i n t e r m s of j obs a nd gr ow t h a t hom e .
E a s t e r n q u e s t i o n s
T he E U ’ s r e l a t i ons hi p w i t h c ount r i e s t o i t s e a s t ha s a l s o be c om e m or e
pr obl e m a t i c i n t he pa s t f e w ye a r s . O ne r e a s on f or t hi s i s t ha t t he t r a di t i ona l
pol i c y of e nl a r ge m e nt t o a dm i t ne w c ount r i e s ha s r un i n t o t r oubl e .
E nl a r ge m e nt ha s of t e n be e n de s c r i be d a s t he E U ’ s m os t s uc c e s s f ul f or e i gn
pol i c y . I n t he 1980s , t a ki ng i n c ount r i e s l i ke G r e e c e , S pa i n a nd P or t uga l
w a s huge l y i m por t a nt i n s e c ur i ng t he i r t r a ns i t i on f r om m i l i t a r y
di c t a t or s hi p t o de m oc r a t i c gove r nm e nt . E ve n m or e s pe c t a c ul a r w a s t he
pr oc e s s a f t e r t he c ol l a ps e of t he S ovi e t U ni on of l e t t i ng m os t of t he c e nt r a l

a nd e a s t e r n E ur o pe a n c ount r i e s t ha t ha d f or m e r l y be e n unde r i t s s w a y i nt o
t he E ur ope a n c l ub. T he t r a ns i t i on of t he s e c ount r i e s t o f r e e – m a r ke t
e c onom i e s a nd l i be r a l de m oc r a c y w oul d ha ve be e n f a r m e s s i e r a nd m i ght
not ha ve ha ppe ne d i n a l l c a s e s ha d i t not be e n f or t he pow e r f ul l ur e of
e ve nt ua l E U m e m be r s hi p. T he c ont r a s t be t w e e n E ur ope ’ s s uc c e s s w i t h
t r a ns f or m i ng i t s e a s t e r n ne i ghbour s a nd t he U ni t e d S t a t e s ’ f a i l ur e w i t h i t s
s out he r n ne i ghbour s i s t e l l i ng.
S i nc e t h e a dm i s s i on of B ul ga r i a a nd R om a ni a i n 2007, how e ve r , t he
e nt i r e pol i c y of e nl a r ge m e nt ha s be e n unde r s om e t hr e a t . P a r t of t he
pr obl e m ha s be e n a gr ow i ng di s i l l us i onm e nt w i t h pa s t e xpa ns i ons of t he
E U . I t i s w i de l y t hought t ha t R om a ni a a nd B ul ga r i a w e r e t a ke n i n a s
m e m be r s be f or e t he y w e r e r e a l l y r e a dy; s om e of t he i r pr e s e nt di f f i c ul t i e s
w i t h a c or r upt j udi c i a r y a nd po l i t i c a l c l a s s c oul d ha ve be e n p r e di c t e d i n
a dva nc e . E qua l l y , C ypr us w a s a l l ow e d t o j oi n i n 2004 e ve n t hough t he
i s l a nd’ s di vi s i on be t w e e n a G r e e k- C ypr i ot s out h a nd a T ur ki s h- C ypr i ot
nor t h r e m a i ne d uns ol ve d. B ot h t he c ont i nui ng C ypr us pr obl e m a nd
H unga r y’ s pr e c a r i ous de m oc r a c y ha ve r e m i nde d t he E U t ha t t he l e ve r a ge i t
ha s ove r i t s m e m be r s i s f a r l e s s pot e nt t ha n i t s l e ve r a ge ove r a ppl i c a nt s .
A nd f or m uc h of publ i c opi n i on i n E ur ope , e nl a r ge m e nt ha s be c om e
f a t a l l y l i nke d t o ne w l y unpopul a r i m m i gr a t i on, e s pe c i a l l y f r om B ul ga r i a
a nd R om a ni a f ol l ow i ng t he l i f t i ng of r e m a i ni ng c ont r ol s on f r e e
m ove m e nt of l a bour on J a nua r y 1s t 2014.
D e s pi t e a l l t hi s , t he C om m i s s i on a r gue s f or c e f ul l y t ha t t he
e nl a r ge m e nt pr oc e s s i s c ont i nui ng. C r oa t i a w a s a dm i t t e d a s t he E U ’ s 28t h
m e m be r i n J ul y 2013, a nd m e m be r s hi p t a l ks c ont i nue w i t h T ur ke y a nd
M ont e ne gr o ( t h ough t a l ks w i t h I c e l a nd ha ve be e n s us pe nde d) . I t i s c l e a r
t ha t t he ot he r w e s t e r n B a l ka n c ount r i e s w i l l e ve nt ua l l y j oi n t he E U , i f onl y
be c a us e t he y ha ve now he r e e l s e t o go. I nde e d, i t i s onl y t hi s pr os pe c t t ha t
ha s s e c ur e d pe a c e a nd s t a bi l i t y i n t he r e gi on. W i t hout t he l ur e of E U
m e m be r s hi p, i t w oul d undoubt e dl y ha ve be e n i m pos s i bl e t o br oke r t he
2013 de a l be t w e e n S e r bi a a nd i t s br e a ka w a y f or m e r pr ovi nc e of K os ovo.
Y e t t he r e a l i t y i s t ha t t he e ur o c r i s i s , t he br oa de r m a l a i s e a c r os s t he E U
a nd i nc r e a s i ng publ i c hos t i l i t y t o unl i m i t e d i m m i gr a t i on ha ve c om bi ne d t o
c a s t a pa l l ove r f ut ur e e nl a r ge m e nt .5

W h o l o s t T u r k e y … a n d U k r a i n e ?
T hi s i s s e e n m os t c l e a r l y i n r e l a t i on t o t he E U ’ s t w o bi gg e s t e a s t e r n
ne i ghbour s , T ur ke y a nd U kr a i ne . A f t e r ye a r s of pr e va r i c a t i on, i nc l udi ng a
ne ga t i ve C om m i s s i on opi ni on on i t s m e m be r s hi p a ppl i c a t i on i n 1987, i t
w a s s e e n a s a t r i um ph f or bot h s i de s w he n a t l ong l a s t T ur ke y’ s a ppl i c a t i on
w a s a c c e pt e d i n 2004 a nd m e m be r s hi p ne got i a t i ons w e r e f or m a l l y ope ne d
i n O c t obe r 2005. T he T ur ki s h gove r nm e nt , l e d by R e c e p T a yyi p E r doga n,
w a s e a g e r l y pus hi ng t hr ough bi g e c onom i c , s oc i a l a nd pol i t i c a l r e f or m s t o
pr e pa r e t he c ount r y f or E U m e m be r s hi p. A l t hough s ubs t a nt i a l oppos i t i on
pe r s i s t e d, e s pe c i a l l y i n F r a nc e , G e r m a ny a nd A us t r i a , a nd a l t hough a
di s uni t e d C ypr u s r e m a i ne d a l a r ge obs t a c l e , t he r e w a s a ge nui n e opt i m i s m
t ha t , m a ybe a f t e r a not he r de c a de or s o, T ur ke y m i ght a c t ua l l y j oi n t he
E ur ope a n c l ub.
Y e t e i gh t ye a r s on f e w pe opl e e ve n pr e t e nd t ha t t he t a l ks w i t h T ur ke y
a r e goi ng a nyw he r e . H a l f of t he 33 c ha pt e r s of t he ne got i a t i ons r e m a i n
f r oz e n, e i t he r by C ypr us , or by F r a nc e or by t he E U a s a w hol e , be c a us e
T ur ke y ha s not i m pl e m e nt e d t he A nka r a pr ot oc ol r e qui r i ng i t t o ope n i t s
por t s a nd a i r por t s t o G r e e k- C y pr i ot ve s s e l s . O nl y one c ha pt e r ha s be e n
c l os e d; a nd, i n t he pa s t t w o ye a r s , onl y one ha s be e n ope ne d. S e ve r a l E U
c ount r i e s ha ve m a de c l e a r t ha t , pa r t l y i n r e s pons e t o t he i r c ur r e nt
e c onom i c di f f i c ul t i e s , t he y a r e m uc h l e s s pr e pa r e d t o t a ke t he ga m bl e of
l e t t i ng T ur ke y i n. E ur ope a n l e a de r s , di s t r a c t e d by t he e ur o c r i s i s , ha ve
ba r e l y e nga ge d w i t h t he i s s ue of t he i r r e l a t i ons w i t h T ur ke y , w hi c h ha ve
s our e d s pe c t a c ul a r l y . U nde r s t a nda bl y , m a ny T ur ks s e e m t o ha ve l os t
i nt e r e s t i n a n E U t ha t t he y be l i e ve ha s r e j e c t e d t he m , pe r ha ps out of a nt i –
M us l i m pr e j udi c e . A nd t he E U ha s i n t ur n l os t m uc h of t he ol d l e ve r a ge i t
ha d t o e nc our a ge f ur t he r r e f o r m i n T ur ke y , w hi c h ha s dr i f t e d unde r
E r doga n i n a n a ut hor i t a r i a n di r e c t i on, e s pe c i a l l y s i nc e t he G e z i P a r k
pr ot e s t s of J une 2013 a nd t he c or r upt i on s c a nda l t ha t br oke i n D e c e m be r
2013. E r doga n’ s a t t e m pt t o r e ki ndl e t he m e m be r s hi p t a l ks by vi s i t i ng
B r us s e l s a nd B e r l i n i n e a r l y 20 14 a nd he l pi ng t o r e vi ve t a l ks on a C ypr us
s e t t l e m e nt ha ve not done e nough t o r e pa i r T ur ke y’ s da m a ge d i m a ge i n
E ur ope . R e c e nt s t or i e s of c or r upt i on i n t he r ul i ng pa r t y , a nd t he c ount r y’ s
gr ow i ng e c ono m i c di f f i c ul t i e s , a r e c r e a t i ng r e ne w e d w or r i e s a bout
T ur ke y’ s s ui t a bi l i t y a s a n E U a s pi r a nt .6

A s i m i l a r l y s a d s t or y c a n be t ol d f or t he s i x c ount r i e s of t he E U ’ s
e a s t e r n pa r t ne r s hi p: A r m e ni a , A z e r ba i j a n, B e l a r us , G e or gi a , M ol dova a nd
U kr a i ne . A f t e r t he R os e a nd O r a nge r e vol ut i ons i n G e or gi a a nd U kr a i ne ,
f ol l ow e d by R us s i a ’ s w a r w i t h G e or gi a i n 2008, i t l ooke d a s i f , de s pi t e t he
R us s i a n bl oc ka ge on f ur t he r e xpa ndi ng N A T O , t he C om m i s s i on w oul d a t
l e a s t be a bl e t o hol d out a l ong- t e r m pr os pe c t of E U m e m be r s hi p t o t he s e
c ount r i e s . Y e t onc e a ga i n E ur o pe a n l e a de r s t ook t he i r e ye s o f f t he ba l l ,
pa r t l y b e c a us e o f t he di s t r a c t i on of t he e ur o c r i s i s . A t t he V i l n i us s um m i t
i n N ove m be r 2013, s e ve r a l c ou nt r i e s , t he bi gge s t a nd m os t i m por t a nt of
w hi c h w a s U kr a i ne , w e r e m e a n t t o s i gn a s s oc i a t i on a gr e e m e nt s w i t h t he
E U t ha t c oul d, e ve nt ua l l y , ha ve be c om e a ba s i s f or pos s i bl e m e m be r s hi p.
I ns t e a d, R us s i a n pr e s s ur e on U kr a i ne a nd s om e ot he r c ount r i e s t o l e a n
e a s t w a r d pa i d of f . O nl y t he r e l a t i ve l y s m a l l G e or gi a a nd M ol dova w e r e
pe r s ua de d t o s t i c k t o t he i r E ur ope a n a m bi t i ons .
T he s i gh t of t hous a nds of pr ot e s t e r s on t he s t r e e t s a nd s qua r e s of a
s now y K i e v , a l l w a vi ng E U f l a gs t o s how t he i r di s pl e a s ur e w i t h t he
de c i s i on of t he i r t huggi s h pr e s i de nt , V i kt or Y a nukovyc h, t o r e j e c t t he E U
a s s oc i a t i on a gr e e m e nt i n f a vour of c l os e r l i nks w i t h R us s i a , w a s i ns pi r i ng
but a l s o de pr e s s i ng. I t w a s i ns pi r i ng, be c a us e i t s how e d how s t r ong t he
a ppe a l o f t i e s w i t h t he E U s t i l l i s t o c ount r i e s f r om t he f or m e r S ovi e t
bl oc k. B ut i t w a s a l s o de pr e s s i ng be c a us e , a t l e a s t i n pa r t due t o t he i r ow n
e c onom i c a nd pol i t i c a l pr obl e m s , E U l e a de r s ha d pa i d t oo l i t t l e a t t e nt i on
t o t h e a d m i t t e dl y di s pi r i t i ng i n t e r na l pol i t i c s of U kr a i ne , a l l ow i ng R us s i a
qui e t l y a nd i ns i di ous l y t o r e ga i n i nf l ue nc e . R us s i a ’ s pr e s i de nt , V l a di m i r
P ut i n, w a s a bl e t o de r a i l U kr a i ni a n pl a ns t o m ove t ow a r ds E ur ope by t he
s i m pl e e xpe di e n t of of f e r i ng a no- s t r i ngs – a t t a c he d l oa n a nd a s ha r p c ut i n
t he ga s pr i c e , w hi c h t he E U s i m pl y c oul d not m a t c h.7
T ha t U kr a i ne s ubs e que nt l y gr a bbe d t he w hol e w or l d’ s a t t e nt i on,
e s pe c i a l l y dur i ng t he 2014 S oc hi w i nt e r O l ym pi c s , w a s m or e t o do w i t h i t s
ow n dys f unc t i on a l pol i t i c s a nd t he br a ve r y of i t s pr ot e s t e r s t ha n w i t h t he
E U . T h e A m e r i c a ns w oke up t o t he s i t ua t i on, a nd e s pe c i a l l y t o t he
i nt e r f e r e nc e of P ut i n, e a r l i e r t ha n t he E ur ope a ns ; a t r ut h t ha t be c a m e
s t a r ke r w he n a l e a ke d r e c or di n g, pr e s um a bl y m a de by R us s i a n s e c ur i t y
s e r vi c e s , s how e d V i c t or i a N ul a n d, t he a s s i s t a nt s e c r e t a r y f or E ur ope i n t he
S t a t e D e pa r t m e nt , s a yi ng t o h e r a m ba s s a dor i n K i e v: “ F uc k t he E U .”

W he n a f e w da ys l a t e r Y a nukovyc h’ s goons be ga n t o ki l l pe opl e i n K i e v
a nd e l s e w he r e , m a t t e r s r a pi dl y s pun out of hi s c ont r ol . S oon e nough he ha d
be e n c h a s e d ou t of t he c a pi t a l a nd a ne w gove r nm e nt w a s i ns t a l l e d t ha t
m a y ye t t ur n ba c k t ow a r ds t he E U . B ut de t e r m i ne d not t o l os e U kr a i ne ,
P ut i n p r om pt l y l a unc he d a n i nva s i on of C r i m e a . I n m i d- M a r c h 2014
C r i m e a , unde r t he ga z e of oc c upyi ng R us s i a n t r oops , de c l a r e d i t s
i nde pe nde nc e f r om U kr a i ne a nd a s ke d t o j oi n t he R us s i a n F e de r a t i on
i ns t e a d. T he E U a nd t he U ni t e d S t a t e s r e s ponde d w i t h a vi s a f r e e z e a nd
ot he r s a nc t i ons on na m e d i ndi vi dua l s , a s R us s i a n f or c e s ga t he r e d
t hr e a t e ni ngl y on t he bor de r w i t h e a s t e r n U kr a i ne . T he e ve nt ua l out c om e i n
U kr a i ne r e m a i ns hi ghl y unc e r t a i n. B ut w ha t s e e m s c l e a r i s t ha t t he E U
( a nd t he W e s t ) d r i f t e d i nt o i t s b i gge s t c onf r ont a t i on w i t h R us s i a s i nc e t he
c ol d w a r i n pa r t a s a n a c c i de nt a l by- pr oduc t of i t s e a s t e r n ne i ghbour hood
pol i c y , w hi c h di s t r a c t e d pol i t i c a l l e a de r s ha d l e f t l a r ge l y i n t he ha nds of
C om m i s s i on of f i c i a l s .
T he E U ’ s hope s of pl a yi ng a bi gge r r ol e i n t he w or l d a nd i n i t s
ne i ghbour hood w e r e a l w a ys goi ng t o be ha r d t o r e a l i s e . A de c l i ni ng s ha r e
of t he w or l d’ s popul a t i on a nd G D P , t he r i s e of c ount r i e s l i ke B r a z i l , C hi na
a nd I ndi a a nd a di m i ni s hi ng a ppe t i t e f or m i l i t a r y i nt e r ve nt i on ha ve
i ne vi t a bl y t a ke n t he i r t ol l . Y e t t he E U i s s t i l l t he w or l d’ s bi gge s t e c onom y
a nd s i ng l e t r a di n g bl oc k. H a d t h e c r i s i s not s a ppe d i t s e c onom i c pow e r a nd
i t s pol i t i c a l w i l l , i t s ur e l y w oul d ha ve be e n a bl e t o e xe r t a bi gg e r f or e i gn-
pol i c y i n f l ue nc e t ha n i t ha s m a n a ge d ove r t he pa s t f i ve ye a r s , e s pe c i a l l y i n
i t s ow n ne i ghbour hood. I n s hor t , t he ba l e f ul e f f e c t s of t he e ur o c r i s i s ha ve
be e n s e e n not j us t a t hom e , but a l s o i n t he E U ’ s f a di ng gl oba l c l out .

1 2 A f t e r t h e s t o r m
SO WERE THE SCEPTICS RIGHT ALL ALONG? I t i s ha r d t o a vo i d t he c onc l us i on
t ha t t he s i ngl e c ur r e nc y ha s be e n a t e r r i bl e f ol l y . I t s f a i l i ngs h a ve br ought
m i s e r y t o m a ny pa r t s of E ur ope a nd gr a ve l y da m a ge d t he pos t – w a r
E ur ope a n pr oj e c t . A t t he he i ght of t he f i na nc i a l c r i s i s , i n e a r l y 2009, J e a n-
C l a ude T r i c he t , pr e s i de nt of t he E C B , c oul d pl a us i bl y a r gue : “ I n s t or m y
s e a s , i t ’ s be t t e r t o be on a l a r ge s hi p t ha n i n a s m a l l boa t .” B ut t he e ur o
t ur ne d out t o be no m i ght y oc e a n l i ne r ; i t w a s j us t a pl e a s ur e boa t , good
f or s how i ng of f i n s he l t e r e d w a t e r s but da nge r ous on t he ope n s e a s ,
l a c ki ng bul khe a ds , l i f e boa t s or e ve n a t r a i ne d s ki ppe r a nd c r e w .
B e i ng l oc ke d i n a s i ngl e c ur r e n c y m a de i t t oo e a s y , a l m os t i ne vi t a bl e ,
f or de f i c i t c ount r i e s t o bui l d up l a r ge i m ba l a nc e s i n good t i m e s ( pum pe d
by t he s a vi ngs o f s ur pl us c ount r i e s ) a nd a goni s i ngl y di f f i c ul t f or t he m t o
a dj us t i n ha r d t i m e s . W i l l i a m H a gue , t he U K ’ s f or e i gn s e c r e t a r y , w a s
pr e s c i e nt w he n he pr e di c t e d b e f or e t he s t a r t of E M U ( he w a s t he n t he
C ons e r va t i ve P a r t y l e a de r ) t ha t t he c ur r e nc y z one w oul d pr ove t o be “ a
bur ni ng bui l di ng w i t h no e xi t s ” . O r a s S i l vi o B e r l us c oni , t he n I t a l y’ s pr i m e
m i ni s t e r , put i t dur i ng t he c r i s i s , t he e ur o i s a “ s t r a nge c ur r e nc y t ha t doe s
not c onvi nc e a nybody” .
W i t h na t i ona l c ur r e nc i e s bond m a r ke t s w oul d ha ve be e n m o r e a l e r t ,
de m a ndi ng hi gh e r i nt e r e s t r a t e s l ong be f or e w e a ke r c ount r i e s c oul d bui l d
up s uc h l a r ge e xt e r na l de f i c i t s . A nd w he n t he c r i s i s c a m e , de va l ua t i on
m i ght h a ve a l l ow e d t he m t o r e ga i n c om pe t i t i ve ne s s m or e e a s i l y . B ut t hi s
j udgm e nt ha s t o be t e m pe r e d. F i r s t , a ny ga i ns f r om de va l ua t i on m i ght
ha ve be e n f r i t t e r e d a w a y t ho ugh i nf l a t i on; a nd i nf l a t i on w oul d ha ve

pus he d up bor r ow i ng c os t s . S e c ond, i t i s l i ke l y t ha t E ur ope ’ s c ur r e nc i e s
w oul d h a ve be e n l i nke d i n s om e w a y , a nd t ha t t he s ys t e m w oul d ha ve be e n
r i ppe d a pa r t w he n t he f i na nc i a l s t or m bl e w i n, w i t h t he D e ut s c hm a r k
a ppr e c i a t i ng s ha r pl y , t he I t a l i a n l i r a de va l ui ng a nd t he F r e nc h f r a nc t or n
be t w e e n t he t w o. T hi r d, c ur r e nc y c ha os m i ght e a s i l y ha ve l e d t o a
pr ot e c t i oni s t f r e e – f or – a l l , unde r m i ni ng t he s i ngl e m a r ke t .
I n o ne f or m or a not he r , m a j or t ur m oi l w a s pr oba bl y una voi da bl e i n
E ur ope . W ha t m i ght onc e ha ve be e n a c ur r e nc y c r i s i s be c a m e , w i t h t he
e ur o, a de bt c r i s i s . T he e ur o a l l ow e d c ount r i e s a c c us t om e d t o hi gh
i nf l a t i on t o a voi d r e f or m i n t he good ye a r s a s t he y be ne f i t e d f r om l ow
i nt e r e s t r a t e s . B r ut a l l y , no dou bt , t he ha r de s t – hi t e c onom i e s ha ve be e n
f or c e d i nt o ove r due r e f or m s , f or i ns t a nc e i n I r e l a nd a nd S pa i n. N ow a da ys
i t i s I t a l y a nd F r a nc e , l e s s t r a um a t i s e d but a l s o l e s s r e f or m e d t ha n ot he r
c ount r i e s , w hi c h pr e s e nt s om e of t he bi gge s t da nge r s t o t he f ut ur e of t he
e ur o. T he y a r e t oo bi g t o f a i l , t oo bi g t o s a ve a nd t oo bi g t o bul l y f r om
B r us s e l s .
E ur ope ’ s r e a l f ol l y w a s not t o l ook f or t he ga i ns f r om a s i ngl e c ur r e nc y
i n t e r m s of t r a de , f i na nc i a l i nt e gr a t i on, e xc ha nge – r a t e s t a bi l i t y a nd
e c onom i c e f f i c i e nc y , e ve n i f t he y m i ght ha ve be e n ove r s t a t e d. T he
m a dne s s w a s t o be l i e ve t ha t t he s e be ne f i t s c oul d be obt a i ne d on t he c he a p,
w i t hout t he pol i t i c a l c ons t r a i nt s , e c onom i c f l e xi bi l i t y , f i na nc i a l t r a ns f e r s
a nd r i s k- s ha r i ng m e c ha ni s m s of ge nui ne f e de r a t i ons . W ha t s t a nds be hi nd
t he e ur o? G e r m a ny? U p t o a poi nt . T he E C B ? O nl y s or t of .
A l m os t e ve r ybody kne w t ha t t he e ur o w a s i nc om pl e t e w he n i t w a s
l a unc he d i n 1999. T hos e w ho s poke up a bout t he f l a w s w e r e l a r ge l y
i gnor e d. T hos e w ho ke pt qui e t hope d t ha t t he pr obl e m s w oul d be r e pa i r e d
a s a nd w he n t he y a ppe a r e d. I t w a s not a n unr e a s ona bl e a s s um pt i on. T he
E ur ope a n pr oj e c t ha s a l w a ys a dva nc e d t hr ough ha l f – s t e ps , i n t he
know l e dge t ha t i na de qua c i e s w oul d e ve nt ua l l y r e qui r e f ur t he r ha l f – s t e ps t o
be m a de good. A s J e a n M onne t , a f oundi ng f a t he r , onc e put i t : “ E ur ope
w i l l be bui l t t hr ough c r i s e s .” T he pr obl e m i s t ha t , w he n t he e ur o c r i s i s
s t r uc k, i t t ur ne d out t o be f a r bi gge r t ha n a nyone ha d i m a gi ne d. T he
de bt or s s c r e a m e d f or he l p, but t he c r e di t or s f e a r e d be i ng pul l e d unde r .
Y e t t he doom s a ye r s w e r e w r ong i n one c r uc i a l r e s pe c t : t he y
unde r e s t i m a t e d E U l e a de r s ’ c om m i t m e nt t o t he E ur ope a n pr oj e c t . T he
e ur o ha s s om e how s ur vi ve d, a nd m a ny a s hor t – s e l l e r ha s l os t m one y

be t t i ng on i t s de m i s e . T he e ur o’ s f a i l i ngs ha ve be e n c om pe ns a t e d by s he e r
pol i t i c a l w i l l a nd t he f e a r of w ha t m i ght ha ppe n i f i t br oke a p a r t . A nge l a
M e r ke l , t he G e r m a n c ha nc e l l or , ha s s t a ke d hundr e ds of bi l l i on s of e ur os –
w or t h of G e r m a n t a xpa ye r s ’ m one y t o r e s c ue ot he r c oun t r i e s , w hi l e
ke e pi ng he r vot e r s ’ t r us t . S he he l d ba c k t hos e w ho w a nt e d t o pus h out
G r e e c e . T he G r e e ks unde r w e nt a ppa l l i ng ha r ds hi ps t o s t a y i n. C ypr us di d
not w a l k out e ve n a f t e r i t s ba nks w e r e c r us he d. T he E C B s t r e t c he d i t s
m a nda t e t o m a ke s ur e t ha t t he e ur o w oul d not br e a k a pa r t . A n d c ount r i e s
a r e s t i l l l i ni ng up t o j oi n: L a t vi a ha s j us t done s o, L i t hua ni a m a y f ol l ow i n
2015.
S o i n t h e e nd, i t w a s t hos e w ho s ubs c r i be d t o t he “ c or ona t i on” t he or y
of t he s i ngl e c ur r e nc y w ho w e r e c l os e s t t o t he c or r e c t a ns w e r : m one t a r y
uni on s houl d ha ve be e n t he c ul m i na t i on of pol i t i c a l uni on, not t he m e a ns
t o a c hi e ve i t . D oe s t ha t m e a n i t i s t i m e t o br e a k up t he m i s be g ot t e n e ur o,
j us t a s c ount r i e s a ba ndone d t he gol d s t a nda r d i n t he 1930s ?
R e de nom i na t i on w oul d be a c ut e l y pa i nf ul . C ha ngi ng c ur r e nc y i s
di f f e r e nt f r om l e a vi ng a f i xe d p e g. W he t he r done by r e t ur ni ng t o na t i ona l
m one y , o r by c r e a t i ng a G e r m a ni c nor t he r n e ur o a nd a L a t i n s o ut he r n one ,
r e de nom i na t i on w oul d m e a n t ha t c ur r e nc i e s , a s s e t s a nd l i a bi l i t i e s w oul d
a l l be r e pr i c e d a br upt l y . S om e c om pa ni e s , i n bot h c r e di t or a nd de bt or
c ount r i e s , w oul d go bus t . S om e c ount r i e s t ha t de va l ue d w oul d be c r us he d
by t he i r e ur o- de nom i na t e d de bt a nd de f a ul t . A nd t he r e c oul d b e ba nk r uns
a s de po s i t or s i n s out he r n c ount r i e s r us he d t o m ove t he i r s a vi ngs t o
nor t he r n one s . T he di s l oc a t i o n w oul d be m os t a c ut e f or t he de f i c i t
c ount r i e s . I f t he e ur o ha s t o be s pl i t , i t w oul d pr oba bl y be l e a s t di s r upt i ve
i f G e r m a ny w e r e t o l e a ve , e i t he r a l one or w i t h a gr oup of nor t he r n
ne i ghbour s , a l l ow i ng t he r e s t t o de va l ue . B ut G e r m a ny w oul d not a voi d
e c onom i c pa i n, a nd a e ur o w i t h out t he E U ’ s l a r ge s t e c onom y w oul d m a ke
l i t t l e s e ns e .
I t i s a l s o unl i ke l y t ha t t he E U ’ s s i ngl e m a r ke t w oul d s ur vi ve t he
i m pl os i on, a s i t w oul d pr oba b l y be f ol l ow e d by c a pi t a l c on t r ol s , t r a de
ba r r i e r s a nd, pos s i bl y , a w a ve of m i gr a t i on. W i t hout t he e ur o or t he s i ngl e
m a r ke t , t he E U w oul d be c om e i r r e l e va nt . A nd vul ne r a bl e de m oc r a c i e s i n
e a s t e r n E ur ope , a nd e ve n i n t he s out h, c oul d l os e t he i r pol i t i c a l a nc hor s .
T he t ow – l i ne t ha t i s pul l i ng t he B a l ka n c ount r i e s t ow a r ds t he E U c oul d
s na p. I n s hor t , i t m us t s t i l l be be t t e r t o r e f i t t he e ur o t ha n t o s c r a p i t ; a nd

be t t e r s t i l l t o do i t dur i ng t he c ur r e nt l ul l r a t he r t ha n w a i t f or t he ne xt
s t or m .
T h e m e a s u r e o f f a i l u r e
T he e ur o z one ha s unde r gone e xt e ns i ve pa t c hi ng. I t now ha s a pe r m a ne nt
r e s c ue f und; t oughe r r ul e s t o m oni t or budge t s a nd e c onom i c i m ba l a nc e s ,
w i t h t he t hr e a t of s e m i – a ut om a t i c s a nc t i ons ; a nd na t i ona l ba l a nc e d- budge t
r ul e s t hr ough t he f i s c a l c om pa c t . I n pr i nc i pl e , a l l r e c ogni s e t he ne e d f or
s t r uc t ur a l r e f or m t o r e ga i n c om pe t i t i ve ne s s a nd e nha nc e gr ow t h. I n
S e pt e m be r 201 3, W ol f ga ng S c hä ubl e , t he G e r m a n f i na nc e m i ni s t e r ,
boa s t e d t ha t t he s l ow r e t ur n t o gr ow t h i n t he e ur o z one , a nd t he
r e ba l a nc i ng of c ur r e nt a c c ount s i n de f i c i t c ount r i e s , w a s pr o of t ha t t he
m uc h- c r i t i c i s e d m e di c i ne w a s w or ki ng:1
Sy s t e m s adapt , dow nt ur ns bot t om out , t r e nds t ur n. I n ot he r w or ds , w hat
i s br ok e n c an be r e pai r e d. E ur ope t oday i s t he pr oof .
Y e t t hi s i s t o m i s s t he poi nt . T he e ur o’ s i s a s t or y of s ur vi va l , not of
s uc c e s s . A l t hough i t i s l i m pi ng ba c k t o gr ow t h, i t s w e a ke r m e m be r s ha ve
s unk de e pe r i nt o de bt . M a s s un e m pl oym e nt a nd de bt de f l a t i o n i n G r e e c e
a r e ha r dl y e vi de nc e of s uc c e s s f ul a dj us t m e nt . T he que s t i on i s not w he t he r
e c onom i e s e ve n t ua l l y bot t om out , but w he t he r pol i t i c i a ns l i m i t or w or s e n
t he da m a ge . O ne a ns w e r i s t o c om pa r e t he e ur o z one ’ s pe r f or m a nc e w i t h
t ha t of t he U ni t e d S t a t e s ( s e e F i gur e 12.1 ) . E ur op e a n l e a de r s l i ke t o bl a m e
t he U ni t e d S t a t e s f or t he i r c r i s i s , a nd t o boa s t t ha t a ggr e ga t e publ i c de bt s
a nd bud ge t de f i c i t s a r e he a l t hi e r t ha n t hos e of t he U ni t e d S t a t e s . S o w hy i s
t he U ni t e d S t a t e s doi ng s o m uc h be t t e r t ha n t he e ur o z one ? U S out put ha s
s ur pa s s e d i t s pr e – c r i s i s pe a k a nd i s gr ow i ng m ode r a t e l y; t he e ur o z one ha s
ye t t o m a ke up t he l os t gr ound a nd gr ow t h i s s t i l l f r a gi l e . U ne m pl oym e nt
w a s a bove 9% o n bot h s i de s of t he A t l a nt i c i n 2009, but i t ha s s i nc e f a l l e n
c l os e t o 7% i n t he U ni t e d S t a t e s a nd r i s e n a bove 12% i n t he e ur o z one . I n
t he pe r i phe r y t he num be r s a r e m uc h w or s e . E ur ope a s a w hol e ha s a l e s s
f a vour a bl e de m o gr a phi c pr of i l e t ha n t he U ni t e d S t a t e s , s o i n t e r m s of G D P
pe r he a d t he gr ow t h f i gur e s a r e a bi t l e s s di r e . N e ve r t he l e s s , t he
di f f e r e nc e s i n pe r f or m a nc e a r e gl a r i ng.

FIG 12.1 T h e c o s t o f f a i l u r e
Euro zone and US GDP at constant prices, 2007–14, 2007 = 100
*Forecast
S o u r c e : IMF World Economic Outlook database, autumn 2013
A c a t a l o g u e o f e r r o r s
E ur ope ’ s r e s pons e ha s be e n s l ow , pa r t i a l a nd of t e n ba f f l i ng t o out s i de r s .
T he a dj us t m e nt ha s be e n ne e dl e s s l y pa i nf ul f or t he de bt or s , a n d pr oba bl y
ne e dl e s s l y e xpe ns i ve f or t he c r e di t or s . L e a de r s of t he e ur o z one a r e
unl i ke l y t o a c know l e dge t he i r e r r or s , but t he i r m a ny c ha nge s of pol i c y
a m ount t o a n i m pl i c i t a dm i s s i on of t he m .
W ho i s t o bl a m e f or t he f i a s c o? T hos e w ho c r e a t e d s uc h a de a t h t r a p of
a c u r r e nc y uni on, t o be gi n w i t h , f ol l ow e d by t he r e c kl e s s bor r ow e r s a nd
t he i r r e s pons i bl e l e nde r s of t he f i r s t de c a de of E M U . T he r ul e r s of de f i c i t
c ount r i e s f ool i s hl y t hought t he y c oul d l i ve i n a G e r m a ni c c ur r e nc y uni on,
a nd e nj o y l ow i nt e r e s t r a t e s , w i t hout be c om i ng m or e G e r m a ni c i n t he i r
a t t i t ude t o budge t s a nd w a ge s . C e r t a i nl y , de f i c i t s i n t he pe r i phe r y w e r e
m i r r or e d by s ur pl us e s i n c or e e c onom i e s . B ut t he t r ut h i s t ha t r unni ng
l a r ge e xt e r na l de f i c i t s i s m or e da nge r ous t ha n ha vi ng s ur pl us e s w he n a
c r i s i s hi t s .
O nc e t he c r i s i s be ga n, t hough, i t i s t he c r e di t or c ount r i e s t ha t m us t
be a r pr i m e r e s pons i bi l i t y . T he y w e r e be s t pl a c e d t o l i m i t t he f a l l out ,
be c a us e e ve r ybo dy ne e de d t he i r m one y , but t he y m a de i t w or s e . A bove a l l
t hi s m e a ns l ooki ng a t t he r ol e pl a ye d by G e r m a ny . I t i s w r ong t o a c c us e i t

of s e l f i s hne s s or , w or s e , of t r yi ng t o dom i na t e E ur ope . G e r m a ny ha s
undoubt e dl y s t a ke d m uc h of i t s t r e a s ur e ( a s ha ve ot he r c o unt r i e s ) on
s a vi ng t he e ur o z one . B ut i t m a d e s e r i ous e r r or s . I t t r e a t e d t he c r i s i s f or f a r
t oo l ong a s a que s t i on of f i s c a l pr of l i ga c y , a nd of i ndi vi dua l c ount r i e s .
M a r i o M ont i w oul d qui p t ha t f or G e r m a ny “ e c onom i c s i s a br a nc h of
m or a l p hi l os ophy” . F i s c a l s i n ne r s ha d t o a t one , a nd t he r i ght f ul ha d
not hi ng t o a pol ogi s e f or . F r e que nt l y i n G e r m a ny e c onom i c s w a s a l s o a
que s t i on of e xt r e m e l e ga l i s m . M a ny of t he m os t s e ni or of f i c i a l s i n t he
G e r m a n f i na nc e m i ni s t r y a r e l a w ye r s , not e c onom i s t s , s t a r t i ng w i t h
S c hä ubl e hi m s e l f .
I t w a s o nl y i n t he s um m e r of 20 12 t ha t G e r m a ny s t a r t e d t o und e r s t a nd
t ha t t he s t r uc t ur e of t he e ur o z o ne i t s e l f w a s uns t a bl e , a nd c a m e a r ound t o
a c c e pt i ng t he ne e d f or a ba nki n g uni on. E ve n t he n i t dr a gge d i t s f e e t ove r
a nyt hi ng t ha t i m pl i e d c om m on l i a bi l i t i e s , a nd i ns i s t e d on a w or r yi ngl y
c om pl e x l e ga l s t r uc t ur e f or t he r e s ol ut i on m e c ha ni s m .
T he i nc ohe r e nc e c a n be unde r s t ood onl y i n t he l i ght of G e r m a ny’ s t w i n
t e r r or s : t he f e a r of m or a l ha z a r d a nd t he f e a r of c ol l a ps e . T he s e a r e be s t
e nc a ps ul a t e d by t w o di c t um s : “ c hac un s a m e r de ” , N i c ol a s S a r koz y’ s
s um m a r y of M e r ke l ’ s r e j e c t i on of a j oi nt ba nk r e s c ue i n 2008; a nd “ ul t i m a
r at i o” , M e r ke l ’ s j us t i f i c a t i on f or ba i l i ng out G r e e c e i n 2010. I n ot he r
w or ds , c ount r i e s m us t de a l w i t h t he i r pr obl e m s on t he i r ow n, a nd s houl d
be he l pe d onl y a s a l a s t r e s or t w he n t he e ur o’ s s ur vi va l i s a t s t a ke . T he
c ons t r a i nt s a r e m e a nt t o l i m i t t he l i a bi l i t i e s of c r e di t or s a nd m a i nt a i n
pr e s s ur e on de bt or s t o r e f or m . B ut t he y ha ve r a i s e d t he c os t a nd l e ngt h of
t he c r i s i s , a nd a l l ow e d doubt s a bout t he e ur o’ s f ut ur e t o f e s t e r , t he r e by
ha m pe r i ng t he r e c ove r y i n t he pe r i phe r y a nd a c c e l e r a t i ng f i na nc i a l
f r a gm e nt a t i on.
O n t he f a c e of i t , t he he r oe s of t he c r i s i s a r e t he t w o pr e s i de nt s of t he
E C B , T r i c he t a nd e s pe c i a l l y M a r i o D r a ghi , w hos e i nt e r ve nt i ons ke pt t he
s ys t e m goi ng w he n t he pol i t i c i a ns w e r e a t e a c h ot he r s ’ t hr oa t s . T he E C B
ga ve t i m e l y w a r ni ngs of t he da nge r of i m ba l a nc e s , a nd r e s ponde d
de c i s i ve l y t o t he f i na nc i a l c r i s i s . B ut onc e t he t r oubl e s pr e a d t o
s ove r e i gns , i t be c a m e m uc h m or e c a ut i ous . I t w a s w i l l i ng t o pr ovi de
l i qui di t y t o ba nks , e ve n t hos e t ha t w e r e pa t e nt l y bus t , but he s i t a t e d t o do
s o o ve r t l y , e ve n f or s ol ve nt s ov e r e i gns . T he E ur os ys t e m of c e nt r a l ba nks
c us hi one d t he bl ow on de f i c i t c ount r i e s by a c c um ul a t i ng l a r ge i m ba l a nc e s

i n t h e e u r o z one ’ s pa ym e nt s e t t l e m e nt s ys t e m , know n a s “ T a r ge t I I ” . A t t he
he i ght of t he c r i s i s i n 2012, G e r m a ny’ s B unde s ba nk ha d, c on t r ove r s i a l l y ,
a c c um ul a t e d c l a i m s w or t h m o r e t ha n €750 bi l l i on a ga i ns t t he E C B . S o
ove r a nd a bove t he vi s i bl e t a xpa ye r – f unde d ba i l – out by t he G e r m a n
gove r nm e nt , e c onom i s t s a r gue d bi t t e r l y ove r w he t he r t he r e w a s a l s o a
l a r ge s t e a l t hy ba i l – out vi a t he B unde s ba nk. T he T a r ge t I I i m ba l a nc e i s
pe r ha ps be s t s e e n a s a r e f l e c t i on of c a pi t a l f l i ght f r om t he t r oubl e d
pe r i phe r y , a nd r a i s e s t he que s t i on of w he t he r c e nt r a l ba nks i n c r e di t or
c ount r i e s w oul d ha ve t o t a ke l a r ge l os s e s s houl d t he e ur o br e a k up a nd t he
de bt or c ount r i e s r e f us e t o s e t t l e t he i r T a r ge t I I l i a bi l i t i e s . I n t he e ve nt , t he
i m ba l a nc e de c l i ne d s t e a di l y a f t e r D r a ghi ’ s “ w ha t e ve r i t t a ke s ” s pe e c h i n
L ondon i n J ul y 2012 r e s t or e d c onf i de nc e i n t he f ut ur e of t he e ur o z one .
T ha t s a i d, t he E C B r e s i s t e d f or f a r t oo l ong t he ne e d t o c ut G r e e c e ’ s
de bt , a n d r e f us e d t o l e t I r e l a nd i m pos e l os s e s on bondhol de r s . I t de vi s e d
a n e f f e c t i ve m e a ns of ha l t i ng c ont a gi on onl y i n t he s um m e r of 2012, a f t e r
t w o ye a r s of c r i s i s a nd ha l f – he a r t e d i nt e r ve nt i ons i n bond m a r ke t s . I f
gove r nm e nt s r e s ponde d t oo l a t e , t he E C B of t e n r e s ponde d e ve n l a t e r . I t
f e a r e d t h a t i f i t a c t e d t oo s oon, gove r nm e nt s w oul d be onl y t oo ha ppy t o
l e a ve i t a l one t o de a l w i t h t he c r i s i s . I n t he da r ke s t da ys of t he c r i s i s ,
f r us t r a t e d of f i c i a l s w oul d t e l l T r i c he t : “ Y ou m a y e nd up be i ng a c e nt r a l
ba nk w i t hout a c ur r e nc y .” T o w h i c h he w oul d r e pl y: “ A nd you m a y e nd up
ha vi ng a c ur r e nc y w i t hout a c e nt r a l ba nk.”
T he E C B ha d i t s ow n t w i n f e a r s , bot h of t he m G e r m a n. T h e y w e r e
c a l l e d “ B unde s ba nk” a nd “ K a r l s r uhe ” . T he i nf l a t i on- bus t i ng t r a di t i on of
t he B unde s ba nk m e a nt t ha t t he E C B w oul d r a t he r f l i r t w i t h de f l a t i on t ha n
l e t p r i c e s r i s e t oo hi gh i n G e r m a ny , or ups e t G e r m a n s a ve r s by m or e
a ggr e s s i ve l ow e r i ng of i nt e r e s t r a t e s . I t ne ve r da r e d e nga ge i n t he
a ggr e s s i ve l oos e ni ng of m one t a r y pol i c y , know n a s “ qua nt i t a t i ve e a s i ng”
( i nvol vi ng t he pur c ha s e of gove r nm e nt bonds a nd ot he r a s s e t s ) , l ong
pur s ue d by t he U S F e de r a l R e s e r ve a nd t he B a nk of E ngl a nd. E xc e s s i ve l y
l ow i nf l a t i on, ov e r l y t i ght m one t a r y pol i c y a nd a hi gh e xc ha nge r a t e m a de
i t e ve n ha r de r f or t he pe r i phe r y t o a dj us t r e l a t i ve t o G e r m a ny . T he
B unde s ba nk ope nl y oppos e d a ny r e s or t t o bond- buyi ng t o hol d dow n
bor r ow i ng c os t s . A nd t he E C B s oon r a n up a ga i ns t t he e ve n gr e a t e r
i nt r a ns i ge nc e of t he G e r m a n c ons t i t ut i ona l c our t , w hi c h r ul e d t ha t
D r a ghi ’ s pol i c y of out r i ght m o ne t a r y t r a ns a c t i ons ( O M T ) , t h e one t r ue

f i r e w a l l t ha t ha d a r r e s t e d t he f i na nc i a l bl a z e , w a s i l l e ga l ( t hough i t of f e r e d
a s t a y of e xe c ut i on by pa s s i ng t he c a s e on t o t he E ur ope a n C our t of
J us t i c e ) .
T he f a c t t ha t t he c r i s i s s t a r t e d i n G r e e c e , t he c l e a r e s t c a s e o f publ i c
s pe ndi ng gone w i l d a nd of a gove r nm e nt unw i l l i ng or una bl e t o e na c t
r e f or m , di d m uc h t o r e i nf or c e t he pr e j udi c e s a nd f e a r s of G e r m a ny a nd t he
E C B . I t i s pl a i n t o a l l i n r e t r os pe c t – a nd pr oba bl y t o t hos e w h o kne w t he
r e a l num be r s a t t he t i m e – t ha t t he f i r s t G r e e k ba i l – out w a s i l l – c onc e i ve d.
I t t r e a t e d G r e e c e a s a pr obl e m of l i qui di t y r a t he r t ha n of s ol ve nc y . T he
di s t i nc t i on i s of t e n ha r d t o m a ke , a s i t de pe nds l a r ge l y on a c ount r y’ s
pr os pe c t s f or f ut ur e gr ow t h a nd t he i nt e r e s t r a t e t ha t i nve s t or s de m a nd t o
hol d i t s bonds . B ut G r e e c e w a s pl a i nl y ba nkr upt . I t s de bt s houl d ha ve be e n
c ut e a r l y a nd de c i s i ve l y r a t he r t ha n l a t e a nd m e s s i l y , t he r e by gi vi ng
pr i va t e c r e di t or s t he c ha nc e t o dum p G r e e k bonds .
G r e e c e w a s pus he d i nt o pa ni c ke d a nd e xc e s s i ve a us t e r i t y – pa r t l y
be c a us e i t s de bt w a s s o hi gh, a nd pa r t l y be c a us e of a l a c k of c r e di bl e t ool s
t o s t a bi l i s e t he e ur o z one . A nd w he n t he pr ogr a m m e f a i l e d, t hr ough a
c om bi na t i on of G r e e c e ’ s s hor t c o m i ngs a nd t hos e of i t s c r e di t or s , t he t hr e a t
of G r e xi t m a de e ve r yt hi ng m uc h w or s e . T he s a m e w a s t r ue , t o a l e s s e r
e xt e nt , of ot he r pr ogr a m m e c ount r i e s . T he ba i l – out s w e r e a l l t oo opt i m i s t i c
i n t he i r a s s um pt i ons a bout t he r e c e s s i ona r y i m pa c t of a us t e r i t y , a nd put t oo
m uc h f a i t h i n t he not i on t ha t ha i r s hi r t e c onom i c s w oul d r e s t or e m a r ke t
c onf i de nc e . T he e c onom i e s of G r e e c e , I r e l a nd a nd P or t uga l a l l pe r f or m e d
w or s e t ha n f or e c a s t : r e c e s s i ons w e r e de e pe r a nd une m pl oym e nt w a s
hi ghe r . P e r ha ps m os t s t r i ki ng i s t he s ha r p w or s e ni ng of d e bt – t o- G D P
r a t i os . T hi s i s onl y pa r t l y be c a us e de f i c i t s w e r e i nc r e a s i ng t he de bt , or t he
num e r a t or . A bi gge r f a c t or w a s t ha t r e c e s s i on w a s s hr i nki ng ou t put , or t he
de nom i na t or . T he num be r s f or G r e e c e w e r e e s pe c i a l l y di r e – i t s de bt r a t i o
r e a c he d 176% of G D P a nd j ob l e s s ne s s pa s s e d 27% i n 2013 ( s e e F i gur e s
12.2 a nd 12.3 ) – e ve n t houg h t he one t hi ng G r e e c e di d a c hi e ve w a s a
r e duc t i on i n t he de f i c i t m or e or l e s s a c c or di ng t o pl a n.

FIG 12.2 T h e s i n s o f t h e f a t h e r s …
Public debt, 1999–2014, % of GDP
*Forecast
S o u r c e s : Eurostat; European Commission autumn forecast 2013
FIG 12.3 … v i s i t e d u p o n t h e s o n s ?
Unemployment rate, 1999–2014, %
*Forecast
S o u r c e s : Eurostat; European Commission autumn forecast 2013
C ount r i e s i n ba i l – out pr ogr a m m e s w e r e a t f i r s t m a de t o pa y puni t i ve
r a t e s of i nt e r e s t . I t w a s onl y c om pa r a t i ve l y l a t e t ha t t he f oc us s hi f t e d f r om

f i s c a l c o ns ol i da t i on t o s t r uc t ur a l r e f or m s t o m a ke l a bour m a r ke t s m or e
f l e xi bl e a nd e nha nc e pot e nt i a l gr ow t h.
O f t he m e m be r s of t he t r oi ka t ha t ne got i a t e d t he pr ogr a m m e s , pe r ha ps
t he bi gg e s t c ul p r i t i s t he E ur ope a n C om m i s s i on. I t ha d l i t t l e e xpe r i e nc e of
de a l i ng w i t h ba l a nc e – of – pa ym e nt s c r i s e s a nd, unde r pr e s s ur e f r om
G e r m a ny , s uf f e r e d f r om t unne l vi s i on on f i s c a l r ul e s .
E ve n s o, t he I M F c a nnot e s c a pe a l l bl a m e . I t s e xpe r t i s e w a s m os t
ne e de d a t t he s t a r t of t he G r e e k pr ogr a m m e , ye t i t ha d s i gne d up t o a
de e pl y f l a w e d pr ogr a m m e . T he I M F di d, a t l e a s t , t r y t o r e de e m i t s e l f .
S ubs e que nt de bt – s us t a i na bi l i t y a s s e s s m e nt s f or G r e e c e a nd C ypr us w e r e
m or e s obe r . I t publ i s he d a l e s s ons – l e a r nt r e por t on G r e e c e r e c ogni s i ng t ha t
t he c ount r y’ s de bt s houl d ha ve b e e n c ut e a r l i e r .2 I M F e c onom i s t s a dm i t t e d
t ha t i na ppr opr i a t e f i s c a l m ul t i pl i e r s ha d be e n us e d i n f or e c a s t i ng t he
i m pa c t of a us t e r i t y . A nd i t ha s done m uc h va l ua bl e f ut u r e – or i e nt e d
t hi nki ng, f or i ns t a nc e on t he de s i gn of a ba nki ng uni on a nd a put a t i ve
f ut ur e e ur o- z on e budge t . S uc h a s pi r i t of s e l f – e xa m i na t i on a nd ope n
i nqui r y ha s s o f a r l a r ge l y e l ude d t he C om m i s s i on.
M e m be r s of t he E ur ope a n P a r l i a m e nt , w ho ha ve s t a r t e d t o i nqui r e i nt o
t he t r oi ka ’ s w or ki ngs , dr e a m t ha t i t w i l l be r e pl a c e d one da y by a f ul l y
f l e dge d E ur ope a n M one t a r y F und ( bui l t a r ound t he r e s c ue f und, t he
E ur ope a n S t a bi l i t y M e c ha ni s m ) t ha t di s pe ns e s w i t h t he I M F . B ut i t w i l l be
s om e t i m e be f or e t he t r e a t i e s c a n be c ha nge d t o c r e a t e s uc h a body , a nd
e ve n l onge r f or i t t o bui l d up t he ne c e s s a r y c r e di bi l i t y .
I t i s t e m pt i ng t o a r gue t ha t t he e ur o- z one c r i s i s w oul d ha ve be e n
ha ndl e d be t t e r i f l e f t e nt i r e l y i n t he ha nds of t he I M F . B ut gi ve n t he s i z e
a nd i nt e r c onne c t e dne s s of t he e ur o z one ’ s e c onom i e s , a nd t he s l ow pa c e of
a dj us t m e nt i nvol ve d i n “ i nt e r na l de va l ua t i on” w i t h a f i xe d c ur r e nc y , t he
t a s k w a s pr oba bl y be yond t he I M F ’ s r e s our c e s . I t w oul d pr oba bl y a l w a ys
r e qui r e s ubs t a nt i a l e ur o- z one f unds t o r un s uc h ba i l – out pr ogr a m m e s .
A w kw a r d c o- ope r a t i on be t w e e n t he E ur ope a ns a nd t he I M F m a y
t he r e f or e be ne e de d f or ye a r s t o c om e . B ut t he pr e s e nc e of t he E C B i n t he
t r oi ka i s a n a no m a l y . T he c e nt r a l ba nk’ s m a nda t e s houl d no t s t r e t c h t o
ba r ga i ni ng ove r budge t c ut s a nd r e f or m s t o l a bour m a r ke t s , or t hr e a t e ni ng
t o c ut of f l i qui d i t y t o ba nks i f a c ount r y doe s not c om pl y w i t h i t s w i s he s .
A s t he E C B be c om e s t he e ur o z one ’ s m a i n ba nk s upe r vi s or , t he c onf l i c t of

i nt e r e s t i s gl a r i ng. I t i s t i m e , s u r e l y , f or i t t o de pa r t . O ne a dva nt a ge i s t ha t
t he I M F , uns ha c kl e d f r om t he E C B , m i ght be i n a be t t e r pos i t i on t o pus h
t he c e nt r a l ba nk t o l oos e n m one t a r y pol i c y .
T o e num e r a t e t he e r r or s of t he t r oi ka i s not t o a bs ol ve G r e e c e , a nd i t s
B yz a nt i ne pol i t y . I t ha s pr ove n obdur a t e w he n i t c om e s t o s t r uc t ur a l
r e f or m s . N ot hi ng w oul d ha ve s pa r e d G r e e c e t he ne e d f or a n a goni s i ng
f i s c a l a dj us t m e nt . B ut m or e c ohe r e nc e i n t he t r oi ka pr ogr a m m e m i ght
ha ve gi v e n G r e e c e a gr e a t e r c ha nc e of s uc c e s s , a nd a voi de d t he de a t h
s pi r a l t ha t t hr e a t e ne d t o s uc k dow n t he w hol e e ur o z one . A us t e r i t y w a s
pur s ue d t oo z e a l ous l y , but gi ve n t he l e ve l s of de bt i n t he e ur o z one a nd t he
da nge r of l os i ng a c c e s s t o m a r ke t s i n s e ve r a l c ount r i e s , t he r e w a s l i t t l e
s pa c e f o r a nyon e , a pa r t f r om t he l i ke s of G e r m a ny , t o e nga ge i n f i s c a l
s t i m ul us .
I t i s of c our s e e a s i e r t o be w i s e i n r e t r os pe c t . O ne e xpl a na t i on f or t he
m uddl e w a s t he r e a l f e a r of f i na nc i a l i ns t a bi l i t y . I f G r e e c e de f a ul t e d
i m m e di a t e l y , ot he r c ount r i e s m i ght be pus he d i nt o ba nkr upt c y t oo. B e t t e r
t o f udge t he G r e e k num be r s , buy t i m e a nd w a i t f or c ondi t i ons t o i m pr ove
a nd gr ow t h t o r e t ur n. T hi s a r gum e nt w oul d be s t r onge r ha d t he e ur o z one
r e a l l y us e d t he t i m e t o r e de s i g n i t s e l f m or e pr of oundl y . T r ue , i t c obbl e d
t oge t he r a n i na de qua t e ba i l – out f und. B ut i t undi d i t s ow n e f f or t s w i t h a
ha m – f i s t e d ba r ga i n a t D e a uvi l l e a nd i gnor e d t he ba nki ng c r i s i s f or t w o
ye a r s .
P e r ha ps t he ki nde s t t hi ng t ha t c a n be s a i d i s t ha t t he e ur o- z one ’ s
pol i c ym a ke r s , c onf r ont e d w i t h t he i r f i r s t m a j or c r i s i s , ha d t o l e a r n by t r i a l
a nd e r r or . T o bor r ow C hur c hi l l ’ s a poc r ypha l bon m ot a bout A m e r i c a ns , t he
G e r m a ns c a n a l w a ys be r e l i e d upon t o do t he r i ght t hi ng a f t e r t he y ha ve
e xha us t e d a l l pos s i bl e a l t e r na t i ve s .
H a m i l t o n a n d t h e F – w o r d
T he e ur o z one s houl d l ook t o t he U ni t e d S t a t e s a nd a s k i t s e l f : w hy doe s t he
pr os pe c t of de f a ul t by one s t a t e not c a l l i nt o que s t i on t he e xi s t e nc e of t he
dol l a r ? W hy i s t he e ur o s o f l i m s y t ha t a de f a ul t by G r e e c e , a c c ount i ng f or
l e s s t ha n 3% of t he e ur o z one ’ s G D P , s houl d ha ve be e n s e e n a s a n
e xi s t e nt i a l t hr e a t ? T he s hor t a n s w e r i s t ha t t he U ni t e d S t a t e s i s a s i ngl e
f e de r a l c ount r y , w hi l e t he e ur o z one i s a m uc h l oos e r c onf e de r a t i on of

s ove r e i gn c ount r i e s . I t m a y us e a s i ngl e c ur r e nc y , but i t ha s 18 na t i ona l
gove r nm e nt s w i t h 18 di f f e r e nt e c onom i c pol i c i e s .
T he e ur o z one ’ s f i na nc i a l s ys t e m w a s s uf f i c i e nt l y i nt e gr a t e d t o s pr e a d
c ont a gi on, but not i nt e gr a t e d e nough t o pr ovi de r e s i l i e nc e . I t ha s no
c e nt r a l budge t or ot he r m e a ns of a bs or bi ng a s ym m e t r i c s hoc ks t ha t hi t one
or t w o c ount r i e s di s pr opor t i ona t e l y . U nt i l t he E C B c a m e up w i t h t he pol i c y
of O M T , i t ha d no e f f e c t i ve l e nde r of l a s t r e s or t , s o c ount r i e s w e r e i n
e f f e c t bo r r ow i ng i n a f or e i gn c ur r e nc y . T he s e f a ul t s m e a nt t ha t t he no- ba i l –
out r ul e , a l t hough e ns hr i ne d i n t he M a a s t r i c ht t r e a t y , w a s not c r e di bl e
w he n t he c r i s i s hi t . Y e t t he e ur o z one ha d no m e a ns of gi vi ng a s s i s t a nc e t o
c ount r i e s t ha t got i nt o t r oubl e . B y c ont r a s t , t he U S f e de r a l gove r nm e nt ha s
s uc c e s s f ul l y r e s i s t e d ba i l i ng out a ny of t he s t a t e s s i nc e t he 1840s , l e a vi ng
t he m a r ke t s t o i m pos e f i s c a l di s c i pl i ne .
R e pe a t e d ba i l – out s i n t he e ur o z one ha ve , i ne vi t a bl y , l e d t o m or e
c e nt r a l c ont r ol s on f i s c a l a nd e c onom i c pol i c i e s . T he “ e c onom i c
gove r na nc e ” c r e a t e d i n r e c e nt ye a r s i s a s oup of i nc om pr e he ns i bl e j a r gon:
s i x- pa c k, t w o- pa c k, f i s c a l c om pa c t , E ur o P l us P a c t , E ur ope a n s e m e s t e r ,
a nnua l gr ow t h s ur ve y , e xc e s s i ve de f i c i t pr oc e dur e , m a c r oe c onom i c
i m ba l a nc e s pr oc e dur e , “ c ont r a c t ua l a r r a nge m e nt s ” f or r e f or m , a nd m uc h
m or e . A l l t hi s a m ount s t o a n unpr e c e de nt e d i nt r us i on by a n un a c c ount a bl e
E U bur e a uc r a c y t ha t s a t i s i f e s nobody: t he C om m i s s i on i s a c c us e d by t he
de bt or s of doi ng t he c r e di t or s ’ bi ddi ng, a nd by t he c r e di t or s of be i ng t oo
s of t on t he s i nne r s . T hi s s ys t e m i s ul t i m a t e l y unt e na bl e . T r ue , t he I M F
a l s o i m p os e s pa i nf ul r e f or m s w he n i t i s c a l l e d i n t o he l p. B ut t he I M F i s a
f or e i gn doc t or w ho e ve nt ua l l y goe s a w a y . I n t he e ur o z one , t he he a l t h
i ns pe c t or s m ove i nt o t he hous e f or e ve r .
I n i t s w e i r d hy br i d c ons t r uc t , pa r t U ni t e d N a t i ons a nd pa r t U ni t e d
S t a t e s , t he e ur o z one of t e n s uf f e r s f r om t he w or s t f e a t ur e s of b ot h. E l e c t e d
gove r nm e nt s a r e be i ng hol l ow e d out by a l os s of pow e r t o B r us s e l s ; but
c i t i z e ns ha ve no di r e c t s a y on d e c i s i ons t a ke n i n B r us s e l s . A t s om e poi nt
t he e ur o z one w i l l di s c ove r s om e t hi ng of t he t r ut hs s e t out m or e t ha n t w o
c e nt ur i e s a go by A l e xa nde r H a m i l t on, t he f i r s t A m e r i c a n t r e a s ur y
s e c r e t a r y , i n t he f e de r a l i s t pa p e r s t ha t he c o- a ut hor e d: t r yi ng t o c oe r c e
s ove r e i gn s t a t e s t o f ol l ow c om m on r ul e s e ve nt ua l l y l e a ds t o c onf l i c t . A
f e de r a l s ys t e m m us t t hus a c t di r e c t l y on t he c i t i z e n, not t he c om pone nt
s t a t e s . H a vi ng c r e a t e d w ha t i s e s s e nt i a l l y a f e de r a l c ur r e nc y f or E ur ope ,

t he c ount r i e s of t he e ur o z one h a ve m uc h t o l e a r n f r om s t udyi n g H a m i l t on,
pa r t i c ul a r l y t he w a y he got t he A m e r i c a n f e de r a l gove r nm e nt t o a s s um e
t he w a r de bt s of t he f or m e r c ol oni e s a nd i s s ue ne w na t i ona l bonds ba c ke d
by di r e c t t a xe s . H i s ne w f i na n c i a l s ys t e m he l pe d t r a ns f or m t he young
r e publ i c f r om a ba s ke t c a s e i nt o a n e c onom i c pow e r hous e .3
B r i n g b a c k n o b a i l – o u t
S o w ha t i s t he w a y f or w a r d? I n t he l onge r t e r m , t he onl y w or k a bl e a ns w e r
i s s ur e l y t o r e s t or e t he c r e di bi l i t y of t he no- ba i l – out r ul e a nd a l l ow
c ount r i e s t o go bus t i f a nd w he n t he y ge t i nt o t r oubl e . T he que s t i on i s , c a n
i t be done unde r t he M a a s t r i c ht m ode l of a ut onom ous na t i ona l e c onom i e s ,
now m o di f i e d b y a ha ndf ul of s t r i c t e r c e nt r a l i s e d r ul e s a nd a s a f e t y ne t
ba s e d on ul t i m a r at i o? O r doe s i t r e qui r e m or e U S – s t yl e f i s c a l f e de r a l i s m ,
i nvol vi ng t he s ha r i ng of l i a bi l i t i e s t hr ough a ut onom ous c e nt r a l bodi e s ? P ut
a not he r w a y , s houl d “ s ol i da r i t y” i n t he e ur o z one ha ppe n onl y i n e xt r e m i s ,
a f t e r a c ount r y ge t s i nt o t r oubl e , i n t he f or m of “ m ut ua l a s s ur a nc e ” by
gove r nm e nt s of f e r i ng he l p i n r e t ur n f or t ough c ondi t i ons ?4 O r s houl d i t
t a ke pl a c e a ut om a t i c a l l y , f or i n s t a nc e r a i s i ng E ur ope a n t a xe s t o de a l w i t h
ba nki ng r i s ks or , s a y , une m pl oym e nt i ns ur a nc e ?
E xpe r t opi ni on i s di vi de d. A s ho ka M ody , a f or m e r s e ni or I M F of f i c i a l ,
a r gue s i n a 2013 pa pe r f or B r ue ge l , a t hi nk- t a nk i n B r us s e l s , t ha t E ur ope a n
of f i c i a l s s houl d r e c ogni s e t ha t t he f e de r a l i s t i m pul s e i s a t a s t a nds t i l l .5
G e r m a ny a nd ot he r s ur pl us c ount r i e s w i l l not a c c e pt a ny m ut ua l i s a t i on of
r i s k, be i t i n t he f or m of j oi nt de bt or j oi nt l i a bi l i t y f or t he ba nks . I ns t e a d,
t he e ur o z one s houl d c onc e nt r a t e on m a ki ng i t e a s i e r t o r e s t r uc t ur e
unpa ya bl e de bt . B a nks s houl d i s s ue c ont i nge nt c onve r t i bl e bon ds t ha t c a n
t ur n de bt i nt o e qui t y w he n t he y ge t i nt o t r oubl e , s o a bs or bi ng l os s e s . A nd
s ove r e i gn bonds s houl d i nc l ude pr ovi s i ons f or m a t ur i t i e s t o b e e xt e nde d
w he n de bt e xc e e ds a c e r t a i n l e ve l . B y c ont r a s t , t he G l i e ni c ke r gr oup, a
c ol l e c t i on of 11 pr o- E ur ope a n G e r m a n e c onom i s t s , l a w ye r s a nd pol i t i c a l
s c i e nt i s t s , i s pus hi ng f or a s t r onge r dos e of f e de r a l i s m .6 I t c a l l s f or a
“ r obus t ” ba nki ng uni on, a “ c ont r ol l e d t r a ns f e r m e c ha ni s m ” i nc l udi n g
c om m on une m pl oym e nt i ns ur a nc e a nd a c om m on budge t t o pr om ot e
publ i c goods . S i m i l a r c onc l us i ons w e r e r e a c he d by a F r e nc h ga t he r i ng
c a l l i ng i t s e l f t he “ E i f f e l G r oup” .7 E c onom i c l ogi c poi nt s t o gr e a t e r

f e de r a l i s m i n f i s c a l a nd ba nki n g a f f a i r s . B ut pol i t i c a l r e a l i t y i s t ha t t he
w a l l e t , a nd t he pow e r t o t a x, w i l l r e m a i n na t i ona l . T he e ur o z one w i l l
t he r e f or e r e m a i n hybr i d f or t he f or e s e e a bl e f ut ur e .
B e s i de s t he r i s k of pol i t i c a l ba c kl a s h a ga i ns t e c onom i c gove r na nc e ,
t he r e a r e ot he r r e a s ons t o w or r y t ha t t he c ur r e nt m ode l i s un s t a bl e . T he
E C B ’ s pos i t i on a s l e nde r of l a s t r e s or t r e m a i ns a m bi guous . M a r i o D r a ghi ’ s
gr e a t bl uf f , t he O M T pol i c y , m a y not hol d f or e ve r . M or e ove r , t he E C B ’ s
one – s i z e – f i t s – a l l i nt e r e s t r a t e i s a one – s i z e – f i t s – none a r r a nge m e nt t ha t ha s a
t e nde nc y t o a m pl i f y e c onom i c di ve r ge nc e . I t i s now t oo l ow f o r G e r m a ny
a nd t oo hi gh f o r M e di t e r r a ne a n c ount r i e s , w he r e a s t he s i t ua t i ons w e r e
r e ve r s e d w he n t he e ur o be ga n i n 1999. S i m i l a r a r gum e nt s a ppl y t o t he
c om m on e xc ha nge r a t e , w hi c h ha s t e nde d t o f a vour hi gh- e nd G e r m a n
e xpor t s ove r , f or e xa m pl e , m or e pr i c e – s e ns i t i ve I t a l i a n one s . S om e w or r y
t ha t , a s a r e s u l t of t he c r i s i s m one y , pr oduc t i on c a pa c i t y a nd s ki l l e d
w or ke r s a r e s hi f t i ng pe r m a ne nt l y t o c or e e c onom i e s t hr ough t he s o- c a l l e d
“ a ggl om e r a t i on e f f e c t ” , w i t h no t r a ns f e r s t o s of t e n t he b l ow t o t he
pe r i phe r y .
W i t hout a l a r ge A m e r i c a n- s t yl e f e de r a l budge t , c ount r i e s of t he e ur o
z one ne e d ot he r m e a ns t o a d j us t : m or e f l e xi bl e m a r ke t s f or l a bour ,
pr oduc t s a nd s e r vi c e s ; gr e a t e r m obi l i t y of w or ke r s ; a nd m or e c r os s – bor de r
ow ne r s hi p of a s s e t s . B ut i n a l l t he s e r e s pe c t s , E U c ount r i e s a r e a l ot l e s s
i nt e gr a t e d t ha n t he U ni t e d S t a t e s . T he pr i nc i pa l s hoc k a bs or be r i s na t i ona l
bor r ow i ng. B ut i n t i m e s of hi g h de bt , bor r ow i ng i s a l i m i t e d i ns t r um e nt ,
a nd m a y e ve n be c ount e r pr oduc t i ve i f m a r ke t s doubt a c ount r y’ s s ol ve nc y .
T he I M F not e s t ha t f e de r a t i ons s uc h a s t he U ni t e d S t a t e s , C a na da a nd
G e r m a ny a r e a bl e t o a bs or b a bout 80% of e c onom i c s hoc ks i n t he i r s t a t e s
or pr ovi nc e s ,8 w h e r e a s t he e ur o z one m a na ge s t o s m oot h j us t 40% of
a s ym m e t r i c s hoc ks . I n ot he r w or ds , a 1% dr op i n G D P r e s ul t s i n hous e hol d
c ons um pt i on s h r i nki ng by 0.2% i n f e de r a t i ons a nd 0.6% i n t he e ur o z one .
I t i s t hus a ppa r e nt t ha t t he e u r o z one s houl d be c om e , i n s o m e a s pe c t s ,
m or e f e de r a l i f t he e ur o i s t o f unc t i on m or e e f f e c t i ve l y . A s i n t he U ni t e d
S t a t e s or C a na da , t he a i m s houl d be t o c r e a t e a E ur ope a n s ys t e m t ha t i s
r e s i l i e nt e nough t o a l l ow e a c h c ount r y t o m a ke i t s ow n c hoi c e s , a nd be a r
t he c ons e que nc e s w he n t hi ngs go w r ong. D i s c i pl i ne i s be s t e xe r t e d by
m a r ke t s , not E ur oc r a t s . A s t he I M F pa pe r not e s , no- ba i l – out r ul e s a r e m or e

c r e di bl e w he n t he r e a r e r i s k- s ha r i ng m e c ha ni s m s t o c ont a i n t he i m pa c t of
de f a ul t .
S e e n t hi s w a y , m or e f e de r a l i s m i n s om e dom a i ns i s a m e a ns of
r e s t or i ng c hoi c e t o gove r nm e nt s , not of t a ki ng i t a w a y . I t w oul d r e l i e ve
de f i c i t c ount r i e s of e ve r m or e i nt r us i ve c e nt r a l c ont r ol s , a nd s ur pl us
c ount r i e s of t he dut y t o r e s c ue ot he r s . F i s c a l f e de r a l i s m doe s not i m pl y
t ha t t he E U ( or e ur o z one ) ha s t o be c om e t he U ni t e d S t a t e s of E ur ope .
S om e po w e r s c o ul d a nd s houl d be r e pa t r i a t e d a s pa r t of t he ba r g a i n. F or ge t
a bout a E ur ope a n a r m y ( i t w oul d ne ve r l e a ve ba r r a c ks ) or a s i ngl e E U s e a t
a t t he U N . E ur ope doe s not ne e d t o s pe a k w i t h one voi c e . B ut i t ne e ds t he
e ur o z on e t o ope r a t e a s one c ohe r e nt f i na nc i a l s ys t e m . P r e c i s e l y how f a r
i nt e gr a t i on m us t go r e m a i ns s om e t hi ng of a gue s s i ng ga m e . B u t he r e a r e a
f e w pr i or i t i e s .
C o m p l e t e b a n k i n g u n i o n
B e gi n w i t h a r e a l ba nki ng uni on. T he e ur o z one ’ s t r oubl e s t a r t e d a s a
ba nki ng c r i s i s a nd, i n c ont r a s t w i t h t he U ni t e d S t a t e s , i t ha s ye t t o be
r e s ol ve d. T he unc e r t a i nt y ove r uns e e n l os s e s i n ba nks i s ha m pe r i ng
r e c ove r y . A ne w s upe r vi s or ha s be e n c r e a t e d a nd ba i l – i n r ul e s ha ve be e n
a gr e e d. G e r m a ny ha s be l a t e dl y a gr e e d t o a c om pl e x ba nk- r e s ol ut i on
m e c ha ni s m a nd a pool e d ba nk- r e s ol ut i on f und, pa i d f or by ba n ks , t ha t w i l l
be c r e a t e d ove r s e ve r a l ye a r s . T ha t i s a pr e c e de nt f or m ut ua l i s a t i on.
I t i s r i ght t ha t ba nks a nd t he i r c r e di t or s be a r t he br unt of ba nk f a i l ur e s .
B ut t o be c om e s t a bl e , ba nki ng uni on ne e ds a t a xpa ye r – f unde d b a c ks t op i f a
bi g c r i s i s s t r i ke s . A c om m on de pos i t – i ns ur a nc e s ys t e m w oul d he l p t o
pr ovi de gr e a t e r s t a bi l i t y . A ha l f – ba ke d ba nki ng uni on w i l l not br e a k t he
vi c i ous c i r c l e be t w e e n w e a k ba nks a nd w e a k s ove r e i gns .
C u t u n p a y a b l e d e b t
S ove r e i gn de bt i s t he ot he r e nd of ba nk- s ove r e i gn l oop. I t ha s r i s e n t o i t s
hi ghe s t l e ve l s i nc e t he s e c ond w or l d w a r , a nd a t t he be gi nni ng of 2014
s t ood a t 95% of G D P on a ve r a g e i n t he e ur o z one – G r e e c e w a s a t 176% ,
I t a l y a t 133% . P r i va t e de bt i s a l s o hi gh i n m a ny c ount r i e s .
O ne l e s s on of t he c r i s i s , e s pe c i a l l y i n G r e e c e , i s t he ne e d f or a c l e a r –
e ye d di s t i nc t i on be t w e e n pr obl e m s of l i qui di t y a nd pr obl e m s of s ol ve nc y .

F udgi ng t he a s s e s s m e nt of a c ou nt r y’ s de bt a nd hopi ng f or t he be s t i s a ba d
c hoi c e f or de bt or a nd c r e di t or a l i ke . I n a ny f ut ur e ba i l – out i t i s be t t e r t o c ut
unpa ya bl e de bt f r om t he out s e t . T he l os s e s w oul d t hus f a l l on t hos e t ha t
l e nt t he m one y t o unc r e di t w or t hy c ount r i e s . A dj us t m e nt pr ogr a m m e s ne e d
t o ha ve s uf f i c i e n t m a r gi ns t o de a l w i t h pr obl e m s w he n f or e c a s t s i ne vi t a bl y
go w r ong. I t i s be t t e r f or a c ou nt r y t o e xc e e d i t s t a r ge t s t ha n c ons i s t e nt l y
unde r s hoot t he m .
H a vi ng m a de t he e r r or , of f i c i a l c r e di t or s s houl d l i f t t he bur de n on
G r e e c e , a s pr om i s e d, now t ha t i t ha s r e a c he d a pr i m a r y budge t s ur pl us
( t ha t i s , be f or e i nt e r e s t pa ym e nt s ) . A de bt w r i t e – of f w oul d be be t t e r t ha n
a n e ndl e s s pr oc e s s of “ e xt e nd a nd pr e t e nd” t ha t l e a ve s a pe r pe t ua l c l oud of
unc e r t a i nt y ove r G r e e c e . T he s oone r a nd m or e e xpl i c i t l y i t i s done , t he
s t r onge r t he s i gna l t o m a r ke t s t ha t G r e e c e i s c om i ng out of i t s m i s e r y .
M or e ove r , a s i m i l a r pr i nc i pl e c oul d be e xt e nde d t o ot he r r e s c ue d
c ount r i e s : t he t e r m s of t he i r ba i l – out l oa ns s houl d be s of t e ne d onc e t he y
ha ve go t i nt o pr i m a r y s ur pl us . T hi s i s e s pe c i a l l y j us t i f i e d i n t he c a s e of
I r e l a nd, w hi c h w a s pr e ve nt e d f r om w i pi ng out s e ni or bondhol de r s of i t s
bus t ba n ks , e ve n t hough t hi s ha s be c om e a n a i m of ba nki ng uni on. I t a l y ,
E ur ope ’ s bi gge s t de bt or , ne e ds t o e m ba r k on s us t a i ne d pr i va t i s a t i on t o pa y
of f de bt a nd e nc our a ge m or e c om pe t i t i on.
O t he r m e a s ur e s t o m a ke i t e a s i e r t o r e s t r uc t ur e de bt , bot h pr i v a t e a nd
publ i c , w oul d be s e ns i bl e .
B o n d t o g e t h e r
I n t he l onge r t e r m , t he e ur o z one s houl d m ove t ow a r ds s om e f or m of
m ut ua l i s a t i on o f de bt . O ne r e a s on i s t o l i m i t e xc e s s i ve bor r o w i ng c os t s ;
a not he r i s t o s e nd a pol i t i c a l s i gna l of c om m i t m e nt t o t h e c om m on
c ur r e nc y; a t hi r d i s t o c r e a t e a s a f e a s s e t f or ba nks t o hol d, s o he l pi ng t o
br e a k t he doom – l oop w i t h s ove r e i gns .
T he r e a r e now m a ny pr opos a l s f or E ur obonds . A 2010 pa pe r by J a kob
von W e i z s ä c ke r a nd J a c que s D e l pl a f or t he B r ue ge l t hi nk- t a nk i n B r us s e l s
pr opos e s a hybr i d “ bl ue bond, r e d bond” s ys t e m : c ount r i e s w oul d i s s ue
j oi nt bonds , gua r a nt e e d j oi nt l y a nd s e ve r a l l y by a l l e ur o- z one m e m be r s
( bl ue bonds ) , up t o t he “ good” d e bt t hr e s hol d of 60% of G D P ; be yond t ha t
c ount r i e s w oul d i s s ue r i s ki e r na t i ona l bonds ( r e d bonds ) . A not he r i de a ,

pr opos e d by t he G e r m a n gove r nm e nt ’ s of f i c i a l c ounc i l of e c onom i c
a dvi s e r s , w a s i ns pi r e d by A l e x a nde r H a m i l t on: i t w oul d pool t he “ ba d”
de bt a bove t he M a a s t r i c ht t hr e s hol d i n a t e m por a r y de bt r e de m pt i on f und
t ha t w ou l d be gua r a nt e e d by a l l , w i t h a c om m i t m e nt by e a c h m e m be r t o
pa y of f i t s s ha r e ove r 20 ye a r s .9 T he l a t t e r i s l e s s c om pl i c a t e d i n l e ga l
t e r m s a nd m a y be a good s t a r t i ng poi nt . I f s uc h a n a s s um pt i on of de bt
c oul d be a c hi e ve d w i t h a not he r H a m i l t oni a n t ouc h, by s i m ul t a ne ous l y
r e s t r uc t ur i ng t he de bt t o l i ght e n t he bur de n, i t w oul d be e ve n be t t e r .
B ut s uc h i de a s f or c om m on b onds r un i nt o a huge obj e c t i on: w hy
s houl d t he t hr i f t y gua r a nt e e de bt s a c c um ul a t e d by t he pr of l i ga t e ? T e xa s
doe s not s t a nd be hi nd C a l i f or ni a ’ s de bt . A m e r i c a n t r e a s ur i e s a r e f e de r a l
de bt , pa i d f or by f e de r a l t a xe s . E m br yoni c f or m s of E ur ope a n d e bt a l r e a dy
e xi s t , s u c h a s bonds i s s ue d by t he r e s c ue f unds . B ut gr a nt i ng E ur ope a n
i ns t i t ut i ons t he a ut hor i t y t o i s s ue de bt a nd r a i s e t a xe s w oul d be
c ont e nt i ous . E u r o- z one “ t r e a s u r i e s ” c oul d s t a r t i n a l i m i t e d m a nne r , f or
i ns t a nc e by i s s ui ng s hor t – da t e d bi l l s . M or a l ha z a r d i s a r e a l pr o bl e m ; a f t e r
a l l , t he e ur o z one ’ s i m ba l a nc e s bui l t up a t a t i m e w he n m a r ke t s be ha ve d a s
i f E ur ob onds w e r e a l r e a dy i n e xi s t e nc e . C l e a r qua l i f i c a t i on c r i t e r i a c oul d
m i t i ga t e t he r i s k a nd gi ve c ou nt r i e s good r e a s ons t o r e f or m . V ul ne r a bl e
c ount r i e s ne e d i nc e nt i ve s a s w e l l a s t hr e a t s a nd r ul e s t o s t i c k t o t he pa t h of
r e f or m .
T h e n e e d t o b a l a n c e
S o f a r t he bur de n of a dj us t m e nt ha s be e n pl a c e d m a i nl y on de f i c i t
c ount r i e s , w hi l e G e r m a ny’ s c ur r e nt – a c c ount s ur pl us ha s c ont i nue d t o gr ow
( s e e F i gur e 12.4 ) , t o t he poi nt w he r e t he U S T r e a s ur y c om pl a i ns t ha t i t i s
ha m pe r i ng r e c ove r y , bot h i n t he e ur o z one a nd gl oba l l y .

FIG 12.4 A l o n g c l i m b
Current-account balance, 2004–14, % of GDP
*Forecast
S o u r c e s : Eurostat; European Commission
I n a n ope n t r a di ng a r e a t he c onne c t i on be t w e e n G e r m a ny’ s s ur pl us a nd
ot he r c ount r i e s ’ de f i c i t s i s c om pl e x. B oos t i ng de m a nd i n G e r m a ny – s a y
by i nc r e a s i ng i nve s t m e nt , a l l ow i ng w a ge s t o r i s e or gr a nt i ng a t a x c ut –
m i ght s uc k i m por t s f r om t he U ni t e d S t a t e s , C hi na or e a s t e r n E ur ope m or e
t ha n f r o m t he M e di t e r r a ne a n. E ve n s o i t w oul d he l p, not l e a s t be c a us e i t
c oul d he l p t o w e a ke n t he e ur o’ s e xc ha nge r a t e ( t hough a be t t e r w a y of
a c hi e vi ng t hi s w oul d be t hr ough l oos e r m one t a r y pol i c y) . I n pol i t i c a l
t e r m s , t h ough, u nl e s s G e r m a ny i s s e e n t o do m or e t o he l p t he e ur o z one ’ s
e c onom i c r e ba l a nc i ng, i t w i l l f a c e s t r onge r c a l l s f or s om e s ys t e m of
pe r m a ne nt f i s c a l t r a ns f e r s . I t i s s t r i ki ng t ha t C hi na ha s done m or e t o
r e duc e i t s s ur pl us a nd r e ba l a nc e t he gl oba l e c onom y , by r a i s i ng i t s
e xc ha nge r a t e a nd s t i m ul a t i ng t he e c onom y , t ha n G e r m a ny .
A s t r o n g e r c e n t r e
F ul l y f l e dge d f e de r a t i ons ha ve a c e nt r a l budge t t ha t pr ovi de s publ i c goods
a nd r e di s t r i but e s i nc om e be t w e e n r i c h a nd poor c i t i z e ns ( a nd s t a t e s ) . T he
budge t he l ps t o a bs or b t he s hoc k w he n one or ot he r r e gi on s uf f e r s a

dow nt ur n. E ve n w he n l oc a l t a x r e ve nue s dr op, t he f e de r a l gove r nm e nt
c ont i nue s t o s pe nd on de f e nc e , c a pi t a l pr oj e c t s , une m pl oym e nt i ns ur a nc e
a nd, of t e n, he a l t h c a r e . F e de r a l budge t s i nva r i a bl y a c t a s t he ba c ks t op f or
t he ba nks . B y c ont r a s t , t he E U ha s a t i ny bud ge t , no pow e r of t a xa t i on a nd
no pow e r s t o bor r ow . A nd t he e ur o z one ha s no budge t a t a l l .
D oe s t h e e ur o z one ne e d a c e nt r a l pot of m one y? F r a nc e w a nt s
c om m on s hor t – t e r m une m pl oym e nt be ne f i t s a c r os s t he e ur o z one .
G e r m a ny w a nt s a m or e l i m i t e d a nd c ondi t i ona l m ode l : pr ovi di ng a t m os t
s m a l l t r a ns f e r s t o c ount r i e s a s pa r t of “ c ont r a c t s ” f or s t r uc t ur a l r e f or m s .
T he I M F ha s s ugge s t e d a m ode s t “ r a i ny- da y” f und, a c ol l e c t i ve s a vi ngs
a c c ount t ha t c oul d m a ke t r a ns f e r s w he n c ount r i e s s uf f e r a dow nt ur n.
B ut e ve n a s m a l l f und r uns i nt o a bi g obs t a c l e . E ur o- z one c ount r i e s
a l r e a dy ha ve l a r ge na t i ona l budge t s , c ons um i ng a bout 50% of G D P .
S pe ndi ng by f e de r a l a nd s t a t e gove r nm e nt s i n t he U ni t e d S t a t e s a m ount s t o
j us t 38% of G D P , a nd 33% o f G D P i n S w i t z e r l a nd. T he E U ’ s budge t
a m ount s t o a bout 1% of G D P . M e a s ur e d a not he r w a y , f e de r a l s pe ndi ng
a c c ount s f or 55% of t ot a l publ i c s pe ndi ng i n t he U ni t e d S t a t e s a nd 43% i n
S w i t z e r l a nd. T he 1977 M a c D ouga l l r e por t s ugge s t e d a c e nt r a l budge t of 5–
7% of G D P i n t he e a r l y s t a ge s of a E ur ope a n f e de r a t i on. E ve n C a na da ’ s
r e l a t i ve l y s m a l l f e de r a l gove r nm e nt a c c ount s f or 34% of t ot a l publ i c
s pe ndi ng. T he e qui va l e nt f i gur e f or t he E U i s c ur r e nt l y 2% of G D P . A ny
e ur o- z one f und w oul d t he r e f or e r e qui r e a ddi ng t o a n a l r e a dy he a vy t a x
bur de n, or s hi f t i ng s pe ndi ng f r om na t i ona l t o E ur ope a n l e ve l , or s ha r pl y
c ut t i ng t he r e s t of t he E U budge t . N one of t he s e w oul d be e a s y .
T he I M F t hi nks a e ur o- z one r a i ny- da y f und, m a de up of a nnua l
c ont r i but i ons of be t w e e n 1.5% a nd 2.5% of G D P ( t ha t i s , a bo ut t w i c e a s
l a r ge a s t he E U ’ s budge t ) , w oul d be e nough t o gi ve t he e ur o z one a s i m i l a r
l e ve l of s hoc k- a bs or pt i on a s ot he r f e de r a t i ons a nd w oul d r oughl y e ve n out
t r a ns f e r s ove r t i m e . H a d i t be e n c r e a t e d i n 1999, a l m os t a l l c ount r i e s
( e xc e pt t i ny L uxe m bour g, w hi c h boa s t s t he E U ’ s r i c he s t popul a t i on) w oul d
ha ve r e c e i ve d r o ughl y t he s a m e a s t he y ha d put i n. G e r m a ny w oul d ha ve
be ne f i t e d w he n i t w a s r e ga r de d a s t he “ s i c k m a n of E ur ope ” . S uc h a n
a ut om a t i c s ys t e m w oul d pr ovi de m or e t i m e l y he l p t ha n a ba i l – o ut f und a nd
a voi d di s put e s ove r c ondi t i ons i m pos e d on r e c i pi e nt s . I f t he E ur ope a n f und
c oul d a l s o i s s ue bonds , i t c oul d r un a c ount e r – c yc l i c a l E ur ope a n- l e ve l

e c onom i c pol i c y dur i ng a ge ne r a l r e c e s s i on, m a ki ng i t e a s i e r f or c ount r i e s
t o s t i c k t o ba l a nc e d- budge t r ul e s .
T he pr obl e m w i t h a r a i ny- da y f und i s t ha t i t i s ha r d t o a s s e s s t he
e c onom i c c yc l e i n r e a l t i m e , s o de c i di ng w he n t o m a ke pa ym e nt s , a nd how
l a r ge t he y s houl d be , c oul d be t r i c ky . T he F r e nc h i de a of a n
une m pl oym e nt – i ns ur a nc e s ys t e m c oul d a c t a s a pr oxy . N a t i ona l
gove r nm e nt s w oul d s t i l l pa y f or l ong- t e r m j obl e s s ne s s , w hi c h r e f l e c t s
na t i ona l l a bour – m a r ke t r i gi di t i e s , w hi l e a E ur ope a n f und c oul d t op up
be ne f i t s f or t he f i r s t s i x m ont hs of une m pl oym e nt t ha t a r e m or e l i ke l y t o
r e f l e c t t he s hor t – t e r m c yc l e . I t i s unl i ke l y t ha t G e r m a ny w oul d e ve r a gr e e
t o t h i s w i t hout a hi gh de gr e e of ha r m oni s a t i on i n l a bour – m a r ke t pr a c t i c e s .
T he G l i e ni c ke r gr oup w oul d e xt e nd une m pl oym e nt i ns ur a nc e onl y t o
“ c ount r i e s t ha t or ga ni s e t he i r l a bour m a r ke t i n l i ne w i t h t he ne e ds of t he
m one t a r y uni on ” . Y e t done pr ope r l y a nd w i t h c l e a r l i m i t s a nd c ondi t i ons ,
s uc h a s ys t e m c oul d s a t i s f y F r a nc e ’ s de s i r e f or a “ s oc i a l ” di m e ns i on t o
E ur ope a nd G e r m a ny’ s i ns i s t e nc e on l a bour – m a r ke t r e f or m s w i t h t he e ur o-
z one ’ s ne e d f or m obi l i t y of w or ke r s .
A m o r e c e n t r a l b a n k
V i s i bl e pr ogr e s s t ow a r ds i nt e gr a t i on w oul d gi ve t he E C B gr e a t e r
c onf i de nc e t o i nt e r ve ne a s a gua r di a n of t he e ur o w hi l e r e f or m s a r e
e na c t e d. I f a f u t ur e e ur o- z one f und a c t e d a s a ba c ks t op f or ba nks a nd
i s s ue d E ur ope a n de bt , t he E C B c oul d i nc r e a s i ngl y a c t a s a l e nde r of l a s t
r e s or t t o t he E ur ope a n f und, r a t he r t ha n t o na t i ona l gove r nm e nt s , t hus
f r e e i ng i t f r om t he unc om f or t a bl e bus i ne s s of s e t t i ng c ondi t i ons , di r e c t l y
or i ndi r e c t l y , i n r e t ur n f or m one t a r y a c t i on t o he l p vul ne r a bl e c ount r i e s .
A s s upe r vi s or of e ur o- z one ba nks , t he E C B s houl d e ns ur e t ha t bond
hol di ngs a r e di ve r s i f i e d a nd e nc our a ge c r os s – bor de r ba nk m e r ge r s , t o he l p
br e a k t he doom – l oop be t w e e n ba nks a nd s ove r e i gns . A nd gi ve n t ha t i t s
s upe r vi s or y r ol e a l r e a dy r a i s e s que s t i ons a bout i t s pol i t i c a l i nde pe nde nc e ,
not l e a s t be c a us e ba nk f a i l ur e s ha ve a n i m pa c t on na t i ona l t r e a s ur i e s , t he
E C B s houl d ge t out of t he e nt a ngl e m e nt of t he t r oi ka .
F or now , t he E C B m us t ha ve t he c our a ge t o l oos e n m one t a r y pol i c y
m or e a ggr e s s i ve l y , de s pi t e G e r m a n c om pl a i nt s t ha t s a vi ngs a r e be i ng
unde r m i ne d, t o a ve r t t he t hr e a t of de f l a t i on. A dos e of A m e r i c a n- s t yl e

qua nt i t a t i ve e a s i ng m a y be i n or de r . O nc e a ga i n, t hough, i t w oul d be e a s i e r
i f t he E C B ha d E ur obonds t o buy i ns t e a d of ha vi ng t o pi c k a nd c hoos e
w hi c h c ount r y’ s de bt t o buy a nd w hi c h t o e xc l ude .
N a r r o w t h e d e m o c r a t i c d e f i c i t
T he i nt e gr a t i on of t he e ur o z o ne , t he i nt r us i on of E ur ope a n bodi e s i nt o
na t i ona l e c onom i c pol i c ym a ki ng a nd t he gr ow i ng popul a r di s e nc ha nt m e nt
w i t h t he E ur ope a n pr oj e c t r e qui r e t he de m oc r a t i c de f i c i t t o be a ddr e s s e d
m or e ur ge nt l y t ha n e ve r .
B ut f or t he f or e s e e a bl e f ut ur e – f or a s l ong a s r e a l pow e r , budge t a r y
a ut hor i t y a nd l e gi t i m a c y l i e w i t h na t i ona l gove r nm e nt s – i t i s be s t t o
e nha nc e t he r ol e of na t i ona l pa r l i a m e nt s a nd pe r ha ps e ve n dow ngr a de t ha t
of t he E ur ope a n P a r l i a m e nt . T hi s c a n be done by gi vi ng na t i ona l
pa r l i a m e nt s gr e a t e r a ut hor i t y t o s c r ut i ni s e t he de c i s i ons t a ke n by na t i ona l
m i ni s t e r s , pr i m e m i ni s t e r s a nd pr e s i de nt s i n B r us s e l s . N a t i ona l
pa r l i a m e nt s c a n a l s o be gi ve n gr e a t e r pow e r s t o ve t o or m odi f y E ur ope a n
l e gi s l a t i on. M or e ove r , t he r e c oul d be s c ope f or a j oi nt body of na t i ona l
M P s t o e xa m i ne i nt e r – gove r nm e nt a l de c i s i ons , s uc h a s ba i l – out de c i s i ons
by t he t r oi ka a nd t he E ur ogr oup.
G i vi ng t he s ys t e m gr e a t e r na t i ona l de m oc r a t i c l e gi t i m a c y w oul d be a
huge s t e p i n t h e r i ght di r e c t i on. B ut e ve n t hi s m a y not be e nough t o
l e gi t i m i s e t he f ul l pa nopl y of m e a s ur e s a nd pr oc e dur e s i n t he E ur ope a n
s e m e s t e r a nd i t s a s s oc i a t e d pa c t s . I f , a s s e e m s l i ke l y , na t i ona l pol i t i c s a t
s om e s t a ge r e a s s e r t s i t s e l f by r e c l a i m i ng f i s c a l a nd e c onom i c a ut onom y
f r om B r us s e l s , i t w i l l be t ha t m uc h m or e i m por t a nt f or pa r l i a m e nt s t o
unde r s t a nd t he E ur ope a n r e pe r c us s i ons of na t i ona l e c onom i c pol i c i e s .
G e r m a ny r e a l i s e d t hi s w he n i t i ns i s t e d t ha t de bt br a ke s be i nt r oduc e d i n
na t i ona l l e gi s l a t i on t hr ough t he f i s c a l c om pa c t .
I f t h e e u r o z one w e r e e ve r t o a dopt t r ul y f e de r a l e l e m e nt s , f or i ns t a nc e
i f i t w e r e gi ve n a c e nt r a l budge t or t he pow e r t o r a i s e t a xe s , t he s e pow e r s
w oul d c e r t a i nl y ne e d t o be he l d t o a c c ount by t he E ur ope a n P a r l i a m e nt . A t
t ha t poi nt t he r e m a y e ve n be s c ope f or t he di r e c t e l e c t i on of s om e j obs i n
B r us s e l s . F or now , t he i ndi r e c t e l e c t i on of c a ndi da t e s f or pr e s i de nt of t he
E ur ope a n C om m i s s i on, a s e nvi s a ge d by t he E ur ope a n P a r l i a m e nt , i s a
t r a ve s t y . V ot e r s a r e not be i ng of f e r e d a r e a l c ha nc e t o i nf l ue nc e E U

pol i c i e s , but t he e xpe r i m e nt w i t h Spi t z e nk andi dat e n ( l e a di ng c a ndi da t e s )
r i s ks c a l l i ng i nt o que s t i on t he i m pa r t i a l i t y of t he C om m i s s i on on a w hol e
s e r i e s of f unc t i ons w he r e i t ne e ds t o a c t a s a r e f e r e e – not l e a s t i n
a s s e s s i ng t he e c onom i c pol i c i e s of i ndi vi dua l c ount r i e s .
A f i t t e r C o m m i s s i o n
T he C om m i s s i on r e m a i ns t he e ngi ne of t he E U . B ut e nl a r ge m e nt of t he
uni on ha s t ur ne d t he c os y ol d c ol l e ge s ys t e m i nt o a n unw i e l dy b ur e a uc r a c y
w i t h 28 c om m i s s i one r s , e a c h a l i t t l e ba r on s e e ki ng t o pus h pe t pr oj e c t s ,
r e s ul t i ng i n l e gi s l a t i ve ove r r e a c h. E s pe c i a l l y a s t he C om m i s s i on ga i ns
pow e r s t o i nf l ue nc e na t i ona l e c onom i c pol i c i e s , i t s houl d ge t out of t he
bus i ne s s of s e t t i ng out t he m i n ut i a e of r e gul a t i on. T he s o- c a l l e d R E F I T
i ni t i a t i ve t o c ut r e d t a pe , s uc h a s a s i l l y pr opos a l t o ba n ha i r dr e s s e r s f r om
w e a r i ng hi gh he e l s , i s a good s t a r t . B ut m uc h m or e c a n be don e t o m a ke a
r e a l i t y of J os é M a nue l B a r r os o’ s di c t um t ha t “ t he E U ne e ds t o be bi g on
bi g t hi ng s , a nd s m a l l e r on s m a l l e r t hi ngs ” . T ha t s a i d, de e pe ni ng t he s i ngl e
m a r ke t by ne c e s s i t y r e qui r e s E ur ope a n- l e ve l r e gul a t i on, i f onl y t o c ut
t hr ough t he t hi c ke t s of 28 di f f e r e nt s e t s of na t i ona l l a w s .
I t i s t i m e t o r e vi ve t he not i on of a m or e s t r e a m l i ne d C om m i s s i on,
pe r ha ps by ha vi ng s e ni or a nd j u ni or c om m i s s i one r s , w hi c h m i ght m a ke i t
e a s i e r t o s l i m dow n t he vol um e of C om m i s s i on a c t i vi t y – s o l ong a s i t c a n
f r e e i t s e l f f r om t he c ont r ol of t he E ur ope a n P a r l i a m e nt , w hi c h f a vour s
m or e l e gi s l a t i on, not l e s s . T he G e r m a ns a nd t he B r i t i s h ha ve a l s o
s ugge s t e d t ha t a l l dr a f t l e gi s l a t i on, w he t he r di r e c t i ve s or r e gul a t i ons ,
s houl d be dr oppe d a t t he e nd o f e ve r y t e r m of a C om m i s s i on, a s ha ppe ns
i n m os t na t i ona l l e gi s l a t ur e s .1 0
I f go ve r nm e nt s w a nt a good C o m m i s s i on, a good pl a c e t o s t a r t w oul d
be f or t he m t o a ppoi nt c om pe t e nt c om m i s s i one r s r a t he r t ha n us e B r us s e l s
a s a dum pi ng gr ound f or s e c ond- di vi s i on pol i t i c a l ha c ks .
C h a r t t h e c o u r s e
C r e a t i ng a m or e s t a bl e a nd i nt e gr a t e d e ur o z one w i l l r e qui r e s e ve r a l bi g
ba r ga i ns – be t w e e n c r e di t or s a nd de bt or s , be t w e e n ol de r a nd ne w e r
m e m be r s , be t w e e n e ur o i ns a nd out s . T he r e w i l l ne e d t o be m uc h m or e

E ur ope i n s om e a r e a s i n r e t ur n f or m uc h l e s s i n ot he r s . A nd a s t he e ur o
z one i nt e gr a t e s , t he r e s houl d be m or e i nt e gr a t i on of t he s i ngl e m a r ke t . T o
na vi ga t e t hr ough t he s e t r e a c he r ous w a t e r s , E ur ope a n c ount r i e s ne e d a
c l e a r e r de s t i na t i on. T he M onne t m e t hod of i nt e gr a t i on s t e p- by- s t e p,
s e c t or – by- s e c t or , w i t h a n a m bi guous f i na l obj e c t i ve , i s r e a c hi ng i t s l i m i t s .
T he e ur o now a f f e c t s t he c or e of na t i ona l pol i t i c s , s o i t c a nnot be
de l e ga t e d t o t e c hnoc r a t s i nde f i ni t e l y . T he s ys t e m w i l l ne e d m or e
de m oc r a c y a nd a c c ount a bi l i t y , t hough how t hi s i s a c hi e ve d m a y ul t i m a t e l y
di f f e r be t w e e n t he e ur o z one a nd t he w i de r E U . H e r m a n V a n R om puy ,
pr e s i de nt of t he E ur ope a n C oun c i l , w a s t hi nki ng a l ong t he r i ght l i ne s w he n
he a ppoi nt e d hi m s e l f t o dr a w up hi s a bor t i ve r oa d m a p f or a “ ge nui ne
e c onom i c a nd m one t a r y uni on” .
M e m be r s of t he e ur o z one do not ye t t r us t e a c h ot he r e nough t o t a ke on
bi g l i a bi l i t i e s i n one l e a p. R e f o r m w i l l ha ve t o be done i n s t a g e s t o bui l d
c onf i de nc e . T o bor r ow S c hä ubl e ’ s phr a s e a bout ba nki ng uni on, t he r e c oul d
f i r s t be a “ w ood e n” s t r uc t ur e , f ol l ow e d by a s t e e l one . B ut i f de bt or s a r e t o
a gr e e t o m or e d i s c i pl i ne , t he y ne e d c onf i de nc e t ha t a s ys t e m of gr e a t e r
s ol i da r i t y w i l l f ol l ow .
G e r m a ny ha s e ve r y r e a s on t o w or r y a bout m or a l ha z a r d. W e a k
c ount r i e s m i ght f a i l t o r e f or m onc e m a r ke t pr e s s ur e i s l i f t e d. B ut m or a l
ha z a r d a ppl i e s t o t he s t r ong t oo : no s oone r ha d f e a r of t he e ur o ’ s br e a k- up
s ubs i de d t ha n G e r m a ny s t a r t e d t o w a t e r dow n ba nki ng uni on. A pl a n f or
gr e a t e r s ha r i ng of l i a bi l i t i e s m a t c he d by t he r e s t or a t i on of a c r e di bl e no-
ba i l – out r ul e c oul d pr ove a n a t t r a c t i ve ba r ga i n.
O ne pr obl e m i s t ha t m a ny c ha nge s w oul d r e qui r e t r e a t y c ha nge . M os t
l e a de r s , l i ke t he i ns t i t ut i ons i n B r us s e l s , r e c oi l a t t he i de a of a bi g
ne got i a t i on a nd m ul t i pl e r e f e r e ndum s a t a t i m e w he n vot e r s a r e r e s t i ve ,
popul i s t s a r e on t he r i s e a nd i nc um be nt s i n t r oubl e a l m os t e ve r yw he r e .
G e r m a ny , c ons c i ous of t he s t r i c t ur e s of i t s c ons t i t ut i ona l c our t , i s m or e
ope n t o r e f or m t hr ough a s uc c e s s i on of s m a l l r e vi s i ons unde r t he
“ s i m pl i f i e d pr o c e dur e ” t ha t r e qui r e s f e w e r r e f e r e ndum s . B ut s uc h
pi e c e m e a l r e f or m s m a y not pr ovi de s c ope f or t he ne c e s s a r y c om pr om i s e s .
A nd t he r e i s a l w a ys r e l uc t a nc e t o gi ve t he U K t he opp or t uni t y t o
c om pl i c a t e t hi ngs w i t h de m a nds f or r e pa t r i a t i on of pow e r s .
A f u l l t r e a t y ne g ot i a t i on m a y be i ne vi t a bl e , e ve n de s i r a bl e , i n 2015 a nd
2016 t o s e t t l e s om e f unda m e nt a l que s t i ons a nd t o e xpl or e w he t he r t he

m i ni m um t ha t t he U K c a n a c c e pt c a n be r e c onc i l e d w i t h t he m a xi m um
t ha t ot he r E U c ount r i e s a r e pr e pa r e d t o of f e r . B ut i f t he pr oc e s s ge t s
bogge d dow n, one w a y a r ound t he s e di f f i c ul t i e s i s t o ne got i a t e i nt e r –
gove r nm e nt a l de a l s out s i de t he E U ’ s t r e a t i e s . E U pur i s t s a nd t h e E ur ope a n
P a r l i a m e nt i nt e ns e l y di s l i ke i nt e r – gove r nm e nt a l i s m . I t de t r a c t s f r om t he
“ c om m uni t y m e t hod” , i t de ni e s pow e r t o t he P a r l i a m e nt a nd i t c r e a t e s
m or e oppor t uni t y f or bi g c ount r i e s t o bul l y s m a l l e r one s . B ut t he a c c or ds
e s t a bl i s hi ng t he E ur ope a n S t a bi l i t y M e c ha ni s m ( E S M ) i n 20 11 a nd t he
f i s c a l c om pa c t i n 2012, bot h i nt e r – gove r nm e nt a l t r e a t i e s , w e r e ne got i a t e d
e a s i l y a nd qui c kl y . A nd t he y br ought a n i m por t a nt i nnova t i on, c om m on i n
ot he r i nt e r na t i o na l t r e a t i e s ( a nd i nde e d i n t he c ons t i t ut i on of t he U ni t e d
S t a t e s ) , of c om i ng i nt o f or c e onc e a t hr e s hol d num be r of r a t i f i c a t i ons w a s
r e a c he d, t ha t i s , w i t hout t he r e qui r e m e nt f or una ni m i t y . T hi s r e duc e s t he
s c ope f or a ngr y hol dout s , be t he y r e f e r e ndum vot e r s or o bs t r e pe r ous
pa r l i a m e nt s , t o bl oc k e ve r yt hi ng. T he E S M i s a l r e a dy a c om m o n f und t ha t
c a n bor r ow on m a r ke t s , s o c oul d e a s i l y be e xpa nde d t o i nc or por a t e ot he r
f unc t i ons .
G r e a t e r i nt e gr a t i on i n t he e ur o z one i s bound t o i nc r e a s e t e ns i ons
be t w e e n t he 18 i ns a nd t he t e n out s . B ut r e l a t i ons w oul d be w or s e s t i l l i f
t he e ur o z one f a i l e d t o r i ght i t s e l f . T he t a s k w i l l be t o bi nd t he e ur o z one
c l os e r t o ge t he r w i t hi n t he w i de r E U . T he t r i c k i s t ha t i nt e gr a t i on of t he
e ur o z one s houl d go ha nd- i n- ha nd w i t h de e pe ni ng t he s i ngl e m a r ke t . B ut
be yond t hi s , s a f e gua r ds w i l l be ne e de d t o e ns ur e t ha t t he i ns do not ga ng
up on t he out s , a nd t ha t t he e ur o z one ’ s pol i c i e s a r e ope n t o ne w c om e r s . I t
i s ha r d t o s e e t he e ur o z one c ons i s t e nt l y vot i ng a s a bl oc k, but t he ha bi t of
c o- or di na t i on, a nd t he f a c t t ha t m os t c ount r i e s s t i l l w a nt t o j oi n t he e ur o,
w i l l w or r y t he r e m a i ni ng out s .
T he U K ’ s f ut ur e s t a t us i s a n a c ut e he a da c he t ha t c oul d c om e t o
dom i na t e m uc h E ur ope a n bus i ne s s . U nl i ke m os t out s , t he U K i s ha l f out of
t he E U a s a w hol e , a nd D a vi d C a m e r on i s pr opos i ng a r e f e r e ndum on i t s
E U m e m be r s hi p i n 2017. T he U K ha s di t he r e d ove r hi s de m a nds i n a
r e ne got i a t i on, p a r t l y be c a us e i t doe s not know w ha t m i ght be o n of f e r . B ut
a m or e c om pl e t e s i ngl e m a r ke t , a m bi t i ous t r a de de a l s , l i ght e r E U
r e gul a t i on, c ur bi ng be ne f i t s f or m i gr a nt s a nd a s m a l l e r E U budge t ( s a y i f
f a r m s p e ndi ng w e r e c ut t o m a ke r oom f or a e ur o- z one f und) m i ght be
a c hi e va bl e . T he de pa r t ur e of t he U K w oul d be a gr a ve l os s , not j us t f or t he

U K but a l s o f or t he E U . E ur o- z one c ount r i e s ne e d t o l i be r a l i s e m a r ke t s ,
bot h t o pr om ot e gr ow t h a nd t o e nha nc e t he i r a bi l i t y t o a dj us t w a ge s a nd
pr i c e s . T he U K ’ s l i be r a l i s i ng z e a l w oul d be i nva l ua bl e .
T h e t w i n d a n g e r s a h e a d
W hi c h w a y i s E ur ope he a di ng? I t s l e a de r s ha ve s how n t he y w i l l a c t t o
a voi d i m m i ne nt s hi pw r e c k. T hi s m e a ns t ha t a s udde n, c a t a s t r ophi c de f a ul t
a nd c ur r e nc y r e de nom i na t i on i s i m pr oba bl e . F or t he s a m e r e a s on,
c ount r i e s a r e unl i ke l y t o he e d T r i c he t ’ s e xhor t a t i ons , a t t he s t a r t of t he
c r i s i s , t o “ i m m e di a t e l y j um p i nt o pol i t i c a l uni on” . E ve n t he m or e f oc us e d
r e f or m s pr opos e d a bove a r e un l i ke l y t o ha ppe n s pont a ne ous l y . M a ny w i l l
s e e t he e c onom i c s e ns e i n s uc h c ha nge s , but t he y c om e w i t h a pol i t i c a l
c os t t o s om e or a l l gove r nm e nt s . T hi s m e a ns t ha t l e a de r s w i l l a c t onl y
w he n c om pe l l e d t o do s o by e ve nt s . T he m os t l i ke l y c our s e i s t o dr i f t , w i t h
pe r i ods of c r i s i s a nd pi e c e m e a l r e f or m s , f ol l ow e d by m or e dr i f t .
T he ne xt c r i s i s – a nd t he r e w i l l s ur e l y be a ne xt c r i s i s – c oul d c om e
f r om a ny num be r of di r e c t i ons . I t c oul d be t r i gge r e d, a s a t t he out s e t , by a
pr obl e m i n t he ba nks . T he e ur o z one ’ s f i na nc i a l s e c t or ha s ha d m uc h
c a pi t a l i nj e c t e d i nt o i t but ba nks r e m a i n w obbl y . A s uc c e s s i on of
di s c r e di t e d s t r e s s t e s t s m e a ns t ha t nobody qui t e know s how m a ny m or e
l os s e s a r e l ur ki ng i n ba nk ba l a nc e s he e t s . T he E C B ’ s r e vi e w of ba nks ’
a s s e t s , due t o be c om pl e t e d i n 2 014, m i ght di s c ove r l os s e s t ha t s ove r e i gns
a r e una bl e t o be a r a nd t he e ur o z one i s unw i l l i ng t o t a ke on.
T he f or t hc om i ng t ur m oi l m i gh t be pr e c i pi t a t e d by doubt s c a s t on t he
one pol i c y t ha t ha s m os t de c i s i ve l y ha l t e d a ny l oom i ng c ol l a ps e : t he
E C B ’ s pr om i s e t o i nt e r ve ne i n bond m a r ke t s i f ne e de d t o s t op t he e ur o
f r om br e a ki ng u p. T he pol i c y of O M T c oul d ye t be unde r m i ne d by t he
l a t e s t ( or a f ut ur e ) a dve r s e r ul i ng i n G e r m a ny’ s c ons t i t ut i ona l c our t .
E na c t i ng O M T r e qui r e s c ount r i e s t o s e e k, a nd r e c e i ve , a r e s c ue
pr ogr a m m e f r om t he E S M , a nd of t e n pa r l i a m e nt a r y vot e s . W oul d t he
B unde s t a g vot e know i ng i t m i ght unl e a s h t he E C B a ga i ns t t he w i l l of t he
B unde s ba nk a nd t he K a r l s r uhe c our t ? W oul d t he B unde s ba nk c om pl y w i t h
E C B de m a nds t o buy bonds ? C onve r s e l y , w i l l t he E C B s t a nd ba c k i f t he
e ur o i s i n da nge r a nd pol i t i c i a ns f a i l t o a c t ? N obody know s w he t he r t he
E C B , i n s e t t i ng no l i m i t f or bond pur c ha s e s , i s ge nui ne l y r e a dy t o buy

unl i m i t e d a m ou nt s of de bt . I n t r ut h, t he E C B ’ s pol i c y of O M T i s a bi t l i ke
a nuc l e a r w e a pon: a de t e r r e nt t ha t m a y w or k be s t i f i t i s ne ve r t e s t e d.
T he t w o m os t obvi ous da nge r s t o t he e ur o z one a r e e c onom i c a nd
pol i t i c a l . T he e ur o z one f a c e s a l ong pe r i od of s t a gna t i on. W e a k r e c ove r y
m e a ns t ha t c ount r i e s w i l l s t r uggl e t o r e duc e m a s s j obl e s s ne s s i n pa r t s of
s out he r n E ur ope , a nd t he y c oul d m or e e a s i l y be pus he d i nt o a t r i pl e – di p
r e c e s s i on. I f t ha t ha ppe ns , w ha t c ha nc e i s t he r e t ha t t he i r pe opl e w i l l put
up w i t h a not he r r ound of a us t e r i t y a nd B r us s e l s – i m pos e d “ e c onom i c
gove r na nc e ” ? J a pa ne s e – s t yl e de f l a t i on w a s a gr ow i ng w or r y i n 2014. I n
s hor t , t he m a r ke t ’ s opt i m i s m i n e a r l y 2014 a bout t he pr os pe c t s f or
pe r i phe r a l e c on om i e s s e e m e d ove r done ; ba d ne w s c oul d br i ng a s udde n
r e a s s e s s m e nt , j us t a s i t di d i n 2010.
E ve n w i t hout s uc h gr i m s c e na r i os , s l ow gr ow t h a nd hi gh
une m pl oym e nt a r e a l r e a dy r a di c a l i s i ng pol i t i c s a nd i nt e ns i f yi ng r e j e c t i on
of b ot h na t i ona l a nd E ur ope a n pol i t i c i a ns . S o t he ne xt c r i s i s m a y w e l l be
pol i t i c a l . A nt i – E U , a nt i – i m m i gr a nt a nd a nt i – e s t a bl i s hm e nt pa r t i e s of a l l
c ol our s a r e on t he r i s e . T he E u r ope a n e l e c t i ons – us ua l l y a s i de s how – of
M a y 201 4 a r e a n i m por t a nt m om e nt . T he r i s e of popul i s t pa r t i e s m a y poi nt
t o a pr e s s i ng ne e d t o r e f or m t he s ys t e m ; ye t t he i r s t r e ngt h m i ght a l s o m a ke
s e ns i bl e c ha nge s ha r d or e ve n i m pos s i bl e . A nt i – E U pa r t i e s a r e di vi de d
a m ong t he m s e l ve s , a nd of t e n m or e i nt e r e s t e d i n m e ga phone ( or Y ouT ube )
pol i t i c s t ha n i n t he de t a i l of pol i c y . T he i r di r e c t i m pa c t on l e gi s l a t i on i n
B r us s e l s m a y t he r e f or e be l i m i t e d, be yond m a ki ng t he E ur ope a n
P a r l i a m e nt noi s i e r . B ut t he popu l i s t pa r t i e s c oul d c ha nge na t i ona l pol i t i c a l
dyna m i c s i n s e ve r a l c ount r i e s , s o a f f e c t i ng E ur ope a n pol i c i e s m or e
i ndi r e c t l y . G ove r nm e nt s m a y f e e l unde r pr e s s ur e t o ha l t r e f or m s , be t he y
na t i ona l or a t t he E ur ope a n l e ve l .
T he r e a f t e r , a na t i ona l e l e c t i on i n t he s out h, s a y i n G r e e c e , c oul d r e t ur n
a c ons t e l l a t i on of pa r t i e s t ha t r e f us e s t o c om pl y w i t h ba i l out c ondi t i ons or
de c i de s t ha t l e a vi ng t he e ur o i s t he l e s s e r e vi l . O r a n e xa s pe r a t e d c r e di t or
c ount r y i n t he nor t h, s a y t he N e t he r l a nds , m i ght r e f us e t o pa y f or t he ne xt
ba i l – out or j us t r e j e c t t he de b t r e s t r uc t ur i ng t ha t G r e e c e ne e ds . O r t he
t r oubl e m i ght c om e f r om a non- e ur o c ount r y , f or i ns t a nc e i f a B r i t i s h
r e f e r e ndum w e r e t o c om e dow n i n f a vour of l e a vi ng t he E U , di s r upt i ng t he
w hol e s ys t e m . O r i m por t a nt c ount r i e s m i ght j us t f a i l t o m us t e r t he
pol i t i c a l s uppor t f or l ong- de l a y e d e c onom i c r e f or m s . I t a l y i s t he pe r e nni a l

ba c km a r ke r i n e c onom i c gr ow t h. F or m a ny gove r nm e nt s , J e a n- C l a ude
J unc ke r ’ s di c t um a bout s t r uc t ur a l r e f or m s s t i l l hol ds : “ W e a l l know w ha t
t o do, w e j us t don’ t know how t o ge t r e – e l e c t e d a f t e r w e ’ ve done i t .” E ve n
a t t he he i ght of t he c r i s i s , a nd l e d by t he r e f or m – m i nde d M a r i o M ont i , t he
I t a l i a n gove r nm e nt f ound i t e a s i e r t o r a i s e t a xe s a nd c ut s pe ndi ng t ha n
c ha l l e nge ve s t e d i nt e r e s t s by e na c t i ng s t r uc t ur a l r e f or m s . I n F r a nc e ,
F r a nç oi s H ol l a nde ha s be l a t e dl y pr om i s e d s om e s t i l l – va gue s uppl y- s i de
r e f or m s , but he m a y be t oo e nf e e bl e d t o de l i ve r . W i t h t h e f a r – r i ght
N a t i ona l F r ont ga i ni ng gr ound, F r a nc e r e m a i ns a c a us e of a c ut e a nxi e t y i n
bot h G e r m a ny a nd B r us s e l s .
A l l t he s e r i s ks of f e r good r e a s ons f or e a r l y a c t i on on t he r e f o r m s s e t
out he r e . A s e ns e of di r e c t i on t ow a r ds i nt e gr a t i on, e ve n i f s l ow a nd
c ondi t i ona l , w oul d he l p s t a bi l i s e t he e ur o z one , r e s t or e c onf i de nc e i n
m a r ke t s t ha t i t i s be i ng r e pa i r e d, pr ovi de i nc e nt i ve s f or r e f or m a nd gi ve
c i t i z e ns i n t he m os t s t r i c ke n c ount r i e s a s e ns e of hope f or a be t t e r f ut ur e . I t
c oul d he l p a voi d t he ne xt c r i s i s , or a t l e a s t m i t i ga t e i t s i m pa c t . B ut
E ur ope ’ s l e a de r s ha ve not pr ove n t o be e ndow e d w i t h l ong- t e r m vi s i on. S o
t he be s t t ha t c a n pr oba bl y be ho pe d f or i s t ha t t he e ur o z one l u r c he s f r om
one c r i s i s – i nduc e d r e f or m t o a not he r . T hi s w i l l be unne c e s s a r i l y c os t l y a nd
pa i nf ul , but m i ght s om e how l e a d t o a m or e c ohe r e nt a nd w or ka bl e s ys t e m .
B ut t he r e i s a no t he r pos s i bi l i t y: t ha t t he e ur o z one , a nd t he E U w i t h i t , w i l l
s t um bl e f r om one c r i s i s t o t he ne xt unt i l , e xha us t e d, one or a l l of i t s
m e m be r s l os e t he w i l l t o pr e s e r ve t he s i ngl e c ur r e nc y , a nd pe r ha ps t he
w i de r pr oj e c t .
E ur ope a ns l i ke t o poi nt out t ha t i t t ook t he U ni t e d S t a t e s m or e t ha n t w o
c e nt ur i e s , m a ny c r i s e s a nd a c i vi l w a r be f or e i t f ul l y de ve l ope d i t s m ode l
of f e de r a l i s m . T o j udge f r om t he r e pe a t e d f l i r t a t i on w i t h s e l f – i nf l i c t e d
de f a ul t , t he U S s ys t e m c oul d s t i l l be pe r f e c t e d. E ur ope c a n t he r e f or e be
f or gi ve n i f i t m ove s s l ow l y a nd unc e r t a i nl y . F or a l l i t s f l a w s , t he E U c a n
c l a i m t o ha ve he l pe d s uppor t pe a c e a m ong i t s m e m be r s f or m or e t ha n s i x
de c a de s .
E ur ope ’ s m ode l , i f i t s ur vi ve s , w i l l be di f f e r e nt f r om t ha t of t he U ni t e d
S t a t e s . E ur ope i s a n ol de r c ont i n e nt , w i t h a m or e he t e r oge ne ous popul a t i on
a nd a de e pe r s e ns e of di s t i nc t na t i ona l hi s t or i e s . A s w e l l a s t he pus h f or
E ur ope a n i nt e gr a t i on, t he r e i s a c ount e r – c ur r e nt of di s a ggr e ga t i on. W e l l
be f or e t h e U K hol ds i t s r e f e r e ndum on E U m e m be r s hi p, S c ot l a n d w i l l hol d

a ba l l ot i n S e pt e m be r 2014 on w he t he r t o r e m a i n w i t hi n t he U K . C a t a l oni a
i s de m a ndi ng a s i m i l a r r i ght t o hol d a r e f e r e ndum on w he t he r t o r e m a i n
pa r t of S pa i n.
S o t he r e w i l l not be a U ni t e d S t a t e s of E ur ope , a nd nor ne e d t he r e be .
T ha t s a i d, E ur ope a ns s houl d not w a s t e t he oppor t uni t y t o l e a r n f r om ot he r s
w ha t w or ks a nd w ha t doe s no t , pa r t i c ul a r l y w he n i t c om e s t o c ur r e nc y
uni ons .
A q u e s t i o n o f ( G e r m a n ) h i s t o r y
E ur ope ’ s c our s e w i l l de pe nd, i n l a r ge pa r t , on G e r m a ny – E ur ope ’ s m os t
pow e r f ul e c onom y a nd bi gge s t c r e di t or . I n m a ny w a ys , t he que s t i on of t he
e ur o c om e s ba c k t o t he ol d que s t i on of G e r m a ny , a c ount r y t o o s t r ong t o
l i ve w i t h e a s i l y ye t not s t r on g e nough t o dom i na t e pe r m a ne nt l y ( or ,
i nde e d, t o r e s c ue e ve r ybody) . T he s i ngl e c ur r e nc y , l i ke t he E ur ope a n
U ni on, w a s m e a nt t o r e c onc i l e G e r m a ny w i t h i t s ol d e ne m i e s a nd ha r ne s s
i t s s t r e ngt h f or t he be ne f i t of t he c ont i ne nt .
G e r m a ny ne e ds a pol i t i c a l s t r a t e gy f or E ur ope . I t ha s be e n c ondi t i one d
t o a v oi d a ny not i on of l e a de r s h i p. B ut l e a d i t m us t . F a i l ur e t o do s o a l s o
ha s c ons e que nc e s . A nge l a M e r k e l ha s w on a t hi r d t e r m a nd t h e r e s pe c t of
m a ny E ur ope a ns . S he i s a pr a g m a t i c pol i t i c i a n, not a vi s i ona r y one . H e r
f a vour i t e di c t um i s “ s t e p- by- s t e p” . I t i s t i m e f or he r t o s a y w he r e s he
w a nt s t o go.
I n 2014 t he w or l d l ooks ba c k 100 ye a r s t o c om m e m or a t e t he c a t a c l ys m
of t he f i r s t of t w o w or l d w a r s , i n w hi c h t he he a r t of t he m a t t e r w a s t he
pow e r of G e r m a ny . T w o w or ks of hi s t or y c onc l ude by r e f l e c t i ng on t he
l e s s ons f or t oda y’ s l e a de r s . I n one , publ i s he d i n 2012, C hr i s t ophe r C l a r k
not e s :1 1
T he ac t or s i n t he e ur o- z one c r i s i s , l i k e t hos e i n 1914, w e r e aw ar e t hat
t he r e w as a pos s i bl e out c om e t hat w oul d be ge ne r al l y c at as t r ophi c ( t he
f ai l ur e of t he e ur o) . A l l t he k e y pr ot agoni s t s hope d t hi s w oul d not
happe n, but i n addi t i on t o t hi s s har e d i nt e r e s t , t he y al l had s pe c i al –
and c onf l i c t i ng – i nt e r e s t s of t he i r ow n.
I n t he s e c ond, publ i s he d i n 2013, B r e nda n S i m m s a s ks , m or e poi nt e dl y:1 2

W i l l B e r l i n c om e t o ac c e pt t hat t he al t e r nat i v e t o a de m oc r at i c al l y
c ont r ol l e d E ur ope an c ur r e nc y i s a G e r m an e c onom i c he ge m ony t hat w i l l
i n t he l ong r un de s t r oy t he E ur ope an U ni on?… I f t hat happe ns , hi s t or y
w i l l j udge t he E ur ope an U ni on an e x pe ns i v e y out hf ul pr ank w hi c h t he
c ont i ne nt pl ay e d i n i t s dot age .
T he f a t he r s of t he E ur ope a n U ni on f e l t t he w e i ght of hi s t or y . T hi s w a s
s t i l l t r u e of t he K ohl – M i t t e r r a nd ge ne r a t i on t ha t c r e a t e d t he e ur o. B ut
t oda y’ s c r op of l e a de r s , f or t he m os t pa r t , s e e s t he pr obl e m s ,
i nc onve ni e nc e , c ons t r a i nt s a nd t hr e a t of E ur ope , r a t he r t ha n i t s pr om i s e .
P e r ha ps t he y l a c k t he m e m or y of w a r , a nd ha ve l os t t he f e a r of hi s t or y’ s
j udgm e nt . O r pe r ha ps now t ha t w a r s e e m s i nc onc e i va bl e a n ol de r hi s t or y
c a n r e a s s e r t i t s e l f , one i n w hi c h ol d na t i ons do not e a s i l y a ba ndon t he i r
pow e r s , pr e r oga t i ve s a nd s e ns e of i de nt i t y . O r pe r ha ps t he E ur ope a n
pr oj e c t ha s be e n s o l ong i n t he m a ki ng t ha t i t ha s l os t i t s r om a nc e .
T he r e i s a n a s ym m e t r y a bout E ur ope ’ s c r i s i s . T he e ur o ha s t he
pot e nt i a l t o de s t r oy t he E ur ope a n pr oj e c t . Y e t s a vi ng t he s i ngl e c ur r e nc y i s
a poor r a l l yi ng- c r y f or E ur ope a n i nt e gr a t i on. S o pr e s s ur e f r om m a r ke t s
br i ngs o nl y s hor t – t e r m e xpe di e nt s , not a de s i gn f or t he f ut ur e . E ur ope ’ s
l e a de r s f e a r undoi ng E ur ope a n i nt e gr a t i on, but da r e not pr om ot e i t e i t he r .
S om e t hi ng of gr e a t va l ue m a y t hus be l os t t hr ough c a r e l e s s ne s s or
t i m i di t y . T he be s t w a y t o ga uge t he a c hi e ve m e nt s of t he E ur ope a n U ni on i s
t o vi s i t i t s e a s t e r n bor de r l a nds . T he E U ha s he l pe d t o s ol i di f y pos t –
c om m uni s t de m oc r a c i e s , m a ny of w hi c h a r e a m ong t he f a s t e s t – gr ow i ng
e c onom i e s i n E ur ope . H e r e c ou nt r i e s a r e s t i l l l i ni ng up t o j oi n t he e ur o,
f l a w e d a s i t m a y be , be c a us e of t he e c onom i c a nd pol i t i c a l s e c ur i t y i t s t i l l
of f e r s i n a n unc e r t a i n r e gi on. J us t be yond, c ount r i e s a r e knoc ki ng a t t he
door t o be a dm i t t e d t o t he E U . T he c ount r i e s of t he w e s t e r n B a l ka ns , m a ny
of t h e m t r a um a t i s e d by t he vi ol e nt br e a k- up of t he f or m e r Y ugos l a vi a , a r e
s t i l l l ur e d by t he i de a of be l ongi ng t o E ur ope ’ s c om m uni t y of de m oc r a c i e s .
I n U kr a i ne , pr ot e s t e r s ha ve f or m ont hs he l d up t he E U ’ s bl ue f l a g a s a
s ym bol of f r e e dom . D e s pi t e s c or e s of pe opl e be i ng s hot de a d i n K i e v , t he y
t oppl e d a c or r upt a nd i ne pt gov e r nm e nt – a nd pr ovoke d a R us s i a n m i l i t a r y
i nt e r ve nt i on w hos e out c om e r e m a i ns unc e r t a i n – i n t he a t t e m pt t o dr a w
t he i r c ount r y c l os e r t o E ur ope .

E ur ope ’ s m a l a i s e i s not one t ha t t i m e a l one c a n he a l . D e l a y i s l i ke l y t o
m a ke t hi ngs w or s e , not be t t e r . T hough t he f i na nc i a l pa ni c i s i n a be ya nc e ,
t he e c onom i c a nd pol i t i c a l c r i s e s a r e f a r f r om ove r , a nd m a y w e l l de e pe n.
R i ght now t he pol i t i c a l m om e nt um i s t ow a r ds f r a gm e nt a t i on, not
i nt e gr a t i on. U nl e s s t he e ur o z on e i s r e de s i gne d w i t h gr e a t e r de t e r m i na t i on,
i n p a r t i c ul a r t hr ough gr e a t e r r i s k- s ha r i ng, i t i s unl i ke l y t o r e c ove r
e c onom i c vi t a l i t y . A nd unl e s s t he e ur o c a n be s how n t o de l i ve r pr os pe r i t y
a nd w e l l – be i ng, publ i c s uppor t f or t he E ur ope a n U ni on w i l l i ne xor a bl y e bb
a w a y .

N o t e s
P r e f a c e
1 L e ona r d, M ., W hy E ur ope w i l l r un t he 21s t C e nt ur y , P ubl i c A f f a i r s
( 2005)
1 I f t h e e u r o f a i l s , E u r o p e f a i l s
1 M e ye r , T ., D e r G e ur o: E i ne P ar al l e l w ähr ung f ür G r i e c he nl and? ( i n
G e r m a n) , D e ut s c he B a nk, M a y 2012, a va i l a bl e a t :
w w w .dbr e s e a r c h.de / P R O D / D B R _I N T E R N E T _D E –
P R O D / P R O D 0000000000288868.pdf . S om e of M e ye r ’ s a r gum e nt s a r e
r e por t e d i n B us i ne s s I ns i de r , a va i l a bl e a t :
w w w .bus i ne s s i ns i de r .c om / i nt r oduc i ng- t he – ge ur o- a – ne w – pa r a l l e l –
c ur r e nc y- t o- s ol ve – a l l – of – gr e e c e s – pr obl e m s – 2012- 5 . M e ye r hi m s e l f
s e t s out s om e of hi s vi e w s i n t hi s pi e c e f or t he W al l St r e e t J our nal ,
a va i l a bl e a t :
onl i ne .w s j .c om / ne w s / a r t i c l e s / S B 100014241278873245563045781168
30518460210
2 R oge r B oot l e e t al ., L e av i ng t he E ur o: A P r ac t i c al G ui de , C a pi t a l
E c onom i c s , r e vi s e d s ubm i s s i on t o t he 2012 W ol f s on P r i z e . T hi s a nd
ot he r s ubm i s s i ons a r e a va i l a bl e a t :
w w w .pol i c ye xc ha nge .or g.uk/ i m a ge s / W ol f s onP r i z e / w ol f s on% 20e c ono
m i c s % 20pr i z e % 20w i nni ng% 20e nt r y .pdf
3 S e e “ T e m pt e d, A nge l a ? ” a t w w w .e c onom i s t .c om / node / 21560269

4 S e e pa ge 22 of G i l l , I .S . a nd R a i s e r , M ., G ol de n G r ow t h: R e s t or i ng
t he L us t r e of t he E ur ope an e c onom i c m ode l , W or l d B a nk, 2012
( ove r vi e w ) ht t p: / / w w w –
w ds .w or l dba nk.or g/ e xt e r na l / de f a ul t / W D S C ont e nt S e r ve r / W D S P / I B / 20
13/ 11/ 15/ 000442464_201311 15123906/ R e nde r e d/ P D F / 681680P U B 0v
10G 00B ox379791B 00P U B L I C 0.pdf
2 F r o m t h e o r i g i n s t o M a a s t r i c h t
1 C hur c hi l l Z ur i c h s pe e c h a va i l a bl e a t : w w w .c hur c hi l l – s oc i e t y-
l ondon.or g.uk/ a s t oni s h.ht m l
2 S c hum a n s pe e c h a va i l a bl e a t : e ur opa .e u/ a bout – e u/ ba s i c –
i nf or m a t i on/ s ym bol s / e ur ope – da y/ s c hum a n- de c l a r a t i on/
3 E ur ope a n C oa l a nd S t e e l C om m uni t y a va i l a bl e a t :
e ur opa .e u/ l e gi s l a t i on_s um m a r i e s / i ns t i t ut i ona l _a f f a i r s / t r e a t i e s / t r e a t i e s
_e c s c _e n.ht m
4 Q uot e d by O t m a r I s s i ng, J ul y 2nd 2013, a va i l a bl e a t : w w w .pr oj e c t –
s yndi c a t e .or g/ c om m e nt a r y/ t he – r i s k- of – e ur ope a n- c e nt r a l i z a t i on- by-
ot m a r – i s s i ng
5 S e e D e l l , E ., T he Sc hum an P l an and t he B r i t i s h A bdi c at i on of
L e ade r s hi p i n E ur ope , O xf or d U ni ve r s i t y P r e s s , 1995, p. 169.
6 Q uot e d i n I n w i t h t he E ur o, O ut w i t h t he P ound by C hr i s t ophe r
J ohns on ( P e ngui n B ooks , 1996) .
7 C r a f t s , N ., Sav i ng t he E ur o: a P y r r hi c V i c t or y , a va i l a bl e a t :
w w w .c ha t ha m hous e .or g/ publ i c a t i ons / pa pe r s / vi e w / 195771
8 T hi s s t or y i s t ol d i n T he O f f i c i al H i s t or y of B r i t ai n and t he E ur ope an
C om m uni t y , V ol um e I I by S t e phe n W a l l ( R out l e dge , 2013) .
9 T hi s s e c t i on ha s dr a w n on M ak i ng t he E ur ope an M one t ar y U ni on by
H a r ol d J a m e s ( H a r va r d U ni ve r s i t y P r e s s , 2012) a nd T he E ur o: t he
B at t l e f or t he N e w G l obal C ur r e nc y by D a vi d M a r s h ( Y a l e U ni ve r s i t y
P r e s s , 2011) .
10 M unde l l , R ., A T he or y of O pt i m um C ur r e nc y A r e as , a va i l a bl e a t :
w w w .a e a w e b.or g/ a e r / t op20/ 51.4.657- 665.pdf
11 R e por t of a s t udy gr oup on t he r ol e of publ i c f i na nc e i n E ur ope a n
i nt e gr a t i on, a va i l a bl e a t :

e c .e ur opa .e u/ e c onom y_f i na nc e / e m u_hi s t or y/ doc um e nt a t i on/ c ha pt e r 8/
19770401e n73m a c douga l l r e pvol 1.pdf
12 T he s t or y of t he s i ngl e m a r ke t a nd t he pa t h t o 1992 i s t ol d i n E ur ope
R e l aunc he d: T r ut hs and I l l us i ons on t he W ay t o 1992 by N i c ol a s
C ol c he s t e r a nd D a vi d B uc ha n ( H ut c hi s on, 1990) .
13 D a vi d C a m e r on, s pe e c h t o W or l d E c onom i c F or um i n D a vos , J a nua r y
26t h 2012, a va i l a bl e a t : w w w .pol i t i c s .c o.uk/ c om m e nt –
a na l ys i s / 2012/ 01/ 26/ da vi d- c a m e r on- s – da vos – s pe e c h- i n- f ul l
14 “ B a nki ng on a c r i s i s ? ” , T he E c onom i s t , O c t obe r 29t h 1998, a va i l a bl e
a t : w w w .e c onom i s t .c om / node / 174327
15 R e por t e d i n w w w .c a us e ur .f r / % C 2% A B – on- ne – r e j e t t e – pa s – pl a t on-
% C 2% B B ,12999
3 H o w i t a l l w o r k s
1 A ppe ndi x 2 s um m a r i s e s t he m a i n t r e a t i e s , r e gul a t i ons a nd pa c t s
gove r ni ng t he E ur ope a n U ni on a nd t he e ur o.
2 T hi s s e c t i on ha s dr a w n on t he t w o be s t ge ne r a l gui de s t o t he E ur ope a n
U ni on: T he P e ngui n C om pani on t o E ur ope an U ni on by A nt hony
T e a s da l e a nd T i m ot hy B a i nbr i dge ( 4t h e di t i on, P e ngui n, 2012) a nd
G ui de t o t he E ur ope an U ni on by D i c k L e ona r d ( 10t h e di t i on, P r of i l e
B ooks , 2010 – 11t h e di t i on due i n 2014) . S e e a l s o T he P as s age t o
E ur ope by L uuk va n M i dde l a a r ( Y a l e U ni ve r s i t y P r e s s , 2013) ,
e s pe c i a l l y f or t he e a r l y ye a r s of t he E ur ope a n pr oj e c t .
3 T he a r gum e nt w a s s e t out i n “ T he S t a bi l i t y P a c t : M or e t ha n a M i nor
N ui s a nc e ” by B a r r y E i c he ngr e e n a nd C ha r l e s W ypl os z i n B e gg, D . e t
al . ( e ds ) , E M U : P r os pe c t s and C hal l e nge s f or t he E ur o, B l a c kw e l l ,
1998.
4 S e e “ F a r e w e l l t o t he s t upi di t y pa c t ” , O c t obe r 22nd 2002, a va i l a bl e a t :
w w w .e c onom i s t .c om / node / 1402102
5 T he s t or y of t he c ons t i t ut i ona l t r e a t y i s t ol d i n t w o books : T he
A c c i de nt al C ons t i t ut i on by P e t e r N or m a n ( E ur oc om m e nt , 2005) a nd
T he St r uggl e f or E ur ope ’ s C ons t i t ut i on by A ndr e w D uf f ( F e de r a l
T r us t , 2005) .
6 O n t he B r i t i s h budge t que s t i on, s e e a m ong ot he r s , A St r ange r i n
E ur ope by S t e phe n W a l l ( O xf or d U ni ve r s i t y P r e s s , 2008) a nd B r i t ai n’ s

Q ue s t f or a R ol e by D a vi d H a nna y ( I .B . T a ur i s , 2013) .
4 B u i l d – u p t o a c r i s i s
1 G i l l , I .S . a nd R a i s e r , M ., G ol de n G r ow t h: R e s t or i ng t he L us t r e of t he
E ur ope an e c onom i c m ode l , W or l d B a nk, 2012, s e e
w w w .w or l dba nk.or g/ e n/ r e gi on/ e c a / publ i c a t i on/ gol de n- gr ow t h
2 G r os , D ., W i l l E M U s ur v i v e 2010?, C e nt r e f or E ur ope a n P ol i c y
S t udi e s , 2006, a va i l a bl e a t : w w w .c e ps .be / c e ps / dl d/ 3059/ pdf
3 T i l f or d, S ., W i l l t he E ur oz one C r ac k ?, C e nt r e f or E ur ope a n R e f or m ,
S e pt e m be r 2006, a va i l a bl e a t :
w w w .c e r .or g.uk/ s i t e s / de f a ul t / f i l e s / publ i c a t i ons / a t t a c hm e nt s / pdf / 2011/
p_688_e ur oz one _c r a c k_42- 892.pdf
4 V e r on, N ., I s E ur ope R e ady f or a M aj or B ank i ng C r i s i s ?, B r ue ge l ,
A ugus t 2007, a va i l a bl e a t : w w w .br ue ge l .or g/ dow nl oa d/ pa r e nt / 234- i s –
e ur ope – r e a dy- f or – a – m a j or – ba nki ng- c r i s i s / f i l e / 659- i s – e ur ope – r e a dy-
f or – a – m a j or – ba nki ng- c r i s i s – e ngl i s h/
5 E M U @ 10: Suc c e s s e s and c hal l e nge s af t e r t e n y e ar s of E c onom i c and
M one t ar y U ni on, E ur ope a n C om m i s s i on, a va i l a bl e a t :
e c .e ur opa .e u/ e c onom y_f i na nc e / publ i c a t i ons / publ i c a t i on12682_e n.pdf
6 D e l or s , J ., R e por t on e c onom i c and m one t ar y uni on i n t he E ur ope an
C om m uni t y , A pr i l 1989, a va i l a bl e a t :
e c .e ur opa .e u/ e c onom y_f i na nc e / publ i c a t i ons / publ i c a t i on6161_e n.pdf
5 T r i c h e t ’ s t e s t
1 A r t i c l e 125: “ A M e m be r S t a t e s ha l l not be l i a bl e f or or a s s um e t he
c om m i t m e nt s of c e nt r a l gove r nm e nt s , r e gi ona l , l oc a l or ot he r publ i c
a ut hor i t i e s , ot he r bodi e s gove r ne d by publ i c l a w , or publ i c
unde r t a ki ngs of a not he r M e m be r S t a t e , w i t hout pr e j udi c e t o m ut ua l
f i na nc i a l gua r a nt e e s f or t he j oi nt e xe c ut i on of a s pe c i f i c pr oj e c t .”
2 A r t i c l e 122.2: “ W he r e a M e m be r S t a t e i s i n di f f i c ul t i e s or i s s e r i ous l y
t hr e a t e ne d w i t h s e ve r e di f f i c ul t i e s c a us e d by na t ur a l di s a s t e r s or
e xc e pt i ona l oc c ur r e nc e s be yond i t s c ont r ol , t he C ounc i l , on a pr opos a l
f r om t he C om m i s s i on, m a y gr a nt , unde r c e r t a i n c ondi t i ons , U ni on
f i na nc i a l a s s i s t a nc e t o t he M e m be r S t a t e c onc e r ne d. T he P r e s i de nt of

t he C ounc i l s ha l l i nf or m t he E ur ope a n P a r l i a m e nt of t he de c i s i on
t a ke n.”
3 T he de t a i l s w e r e r e por t e d by t he W al l St r e e t J our nal m or e t ha n t hr e e
ye a r s a f t e r t he e ve nt , ba s e d on a l e a k of t he boa r d m i nut e s , s e e :
onl i ne .w s j .c om / ne w s / a r t i c l e s / S B 100014240527023044414045791191
80237594344 . T he e xc e r pt s f r om t he m i nut e s a r e w or t h r e a di ng a t :
bl ogs .w s j .c om / e c onom i c s / 2013/ 10/ 07/ i m f – doc um e nt – e xc e r pt s –
di s a gr e e m e nt s – r e ve a l e d/
4 A n a c c ount of t he E C B ’ s a c t i ons i n t hi s ke y w e e ke nd of M a y 2010 i s
gi ve n i n T he A l c he m i s t s : T hr e e C e nt r al B ank e r s and t he W or l d on
F i r e by N e i l U r w i n, V i ki ng P r e s s , 2013. A n e xt r a c t w a s pr i nt e d by t he
W as hi ngt on P os t a t : w w w .w a s hi ngt onpos t .c om / bus i ne s s / t hr e e – da ys –
t ha t – s a ve d- t he – w or l d- f i na nc i a l – s ys t e m / 2013/ 03/ 28/ d5b9a 38c – 94e f –
11e 2- b6f 0- a 5150a 247b6a _pr i nt .ht m l
5 “ E – B onds w oul d e nd t he c r i s i s ” , op- e d i n t he F i nanc i al T i m e s ,
a va i l a bl e a t : w w w .f t .c om / c m s / s / 0/ 540d41c 2- 009f – 11e 0- a a 29-
00144f e a b49a .ht m l #a xz z 2m dxf F 3bW
6 S u p e r M a r i o
1 “ S t a nda r d & P oor ’ s T a ke s V a r i ous R a t i ng A c t i ons O n 16 E ur oz one
S ove r e i gn G ove r nm e nt s ” J a nua r y 13t h 2012, a va i l a bl e a t :
w w w .s t a nda r da ndpoor s .c om / r a t i ngs / a r t i c l e s / e n/ us / ?
a s s e t I D = 1245327295020
2 T ow ar ds a G e nui ne E c onom i c and M one t ar y U ni on, a va i l a bl e a t :
e c .e ur opa .e u/ e c onom y_f i na nc e / c r i s i s / doc um e nt s / 131201_e n.pdf
3 E ur o A r e a S um m i t S t a t e m e nt , J une 29t h 2012, a va i l a bl e a t :
w w w .c ons i l i um .e ur opa .e u/ ue doc s / c m s _da t a / doc s / pr e s s da t a / e n/ e c / 131
359.pdf
4 B e r l us c oni de ni e s de s c r i bi ng t he c ha nc e l l or a s una c ul ona
i nc hi av abi l e ( a n “ unf uc ka bl e f a t – a r s e ” ) , t hough hi s s uppor t e r s a r e
ha ppy t o a l l ude t o t he t e r m . S e e I l F at t o Q uot i di ano a t :
w w w .i l f a t t oquot i di a no.i t / 2011/ 09/ 10/ c uc u- l a – m e r ke l – e –
% E 2% 80% 9C i nc hi a va bi l e % E 2% 80% 9D / 156545/
5 M oody’ s a nnounc e m e nt on J ul y 23r d 2012, a va i l a bl e a t :
w w w .m oodys .c om / r e s e a r c h/ M oodys – c ha nge s – t he – out l ook- t o- ne ga t i ve –

on- G e r m a ny- N e t he r l a nds – L uxe m bour g- – P R _251214
6 S pe e c h by M a r i o D r a ghi , pr e s i de nt of t he E ur ope a n C e nt r a l B a nk, a t
t he G l oba l I nve s t m e nt C onf e r e nc e i n L ondon, J ul y 26t h 2012,
a va i l a bl e a t :
w w w .e c b.e ur opa .e u/ pr e s s / ke y/ da t e / 2012/ ht m l / s p120726.e n.ht m l
7 “ M one y C r e a t i on a nd R e s pons i bi l i t y” , s pe e c h by J e ns W e i dm a nn,
S e pt e m be r 18t h 2012, a va i l a bl e a t :
w w w .bunde s ba nk.de / R e da kt i on/ E N / R e de n/ 2012/ 2012_09_20_w e i dm a
nn_m one y_c r e a kt i on_a nd_r e s pons i bi l i t y .ht m l
8 “ B a nki ng uni on m us t be bui l t on f i r m f ounda t i ons ” , W ol f ga ng
S c hä ubl e , F i nanc i al T i m e s , M a y 12t h 2013, a va i l a bl e a t :
w w w .f t .c om / c m s / s / 0/ 8bda f 6e 8- b89f – 11e 2- 869f –
00144f e a bdc 0.ht m l #a xz z 2uvQ w a e g2
7 T h e c h a n g i n g b a l a n c e o f p o w e r
1 T he be s t a c c ount of t he D e l or s pe r i od i s D e l or s : I ns i de t he H ous e t hat
J ac que s B ui l t by C ha r l e s G r a nt ( N i c hol a s B r e a l e y , 1994) .
2 O ne of t he f i r s t pr opone nt s of ge t t i ng pa r l i a m e nt a r y gr oups t o
nom i na t e t he i r c a ndi da t e s f or t he pr e s i de nc y of t he C om m i s s i on w a s
S i m on H i x i n W hat ’ s W r ong w i t h E ur ope and H ow t o F i x I t ( P ol i t y ,
2008)
3 S e e a r t i c l e on e xt r e m i s t pa r t i e s i n E ur ope publ i s he d i n T he E c onom i s t ,
J a nua r y 4t h 2014, a va i l a bl e a t :
w w w .e c onom i s t .c om / ne w s / br i e f i ng/ 21592666- pa r t i e s – na t i ona l i s t –
r i ght – a r e – c ha ngi ng- t e r m s – e ur ope a n- pol i t i c a l – de ba t e – doe s
4 T hi s i s di s c us s e d i n C an G e r m any be Sav e d? by H a ns – W e r ne r S i nn,
a va i l a bl e a t : w w w .c e s i f o- gr oup.de / i f oH om e / publ i c a t i ons / i ndi vi dua l –
publ i c a t i ons / G e r m a ny/ C a n- G e r m a ny- B e – S a ve d.ht m l
5 S e e “ E ur ope ’ s ne w pe c ki ng or de r ” , a va i l a bl e a t :
w w w .e c onom i s t .c om / node / 13610767
6 A poi nt m a de i n “ F r a nc e : a C ount r y i n D e ni a l ” , a va i l a bl e a t :
w w w .e c onom i s t .c om / node / 21551478
7 H e i s bour g, F ., L a F i n du R ê v e E ur opé e n, S t oc k, 2013.
8 R e por t e d a t : w w w .s pi e ge l .de / i nt e r na t i ona l / e ur ope / now – e ur ope – i s –
s pe a ki ng- ge r m a n- m e r ke l – a l l y- de m a nds – t ha t – br i t a i n- c ont r i but e – t o- e u-

s uc c e s s – a – 798009.ht m l
9 A c om m e nt on t hi s s pe e c h i s a va i l a bl e a t :
w w w .z ukunf t s de ba t t e .e u/ hom e / a kt ue l l / ne w s / / e c f r – w hy- pol a nd- i s – t he –
ne w – f r a nc e – f or – ge r m a ny/
8 I n , o u t , s h a k e i t a l l a b o u t
1 T i nde m a ns , L ., A R e por t on E ur ope an U ni on, a va i l a bl e a t :
books hop.e ur opa .e u/ e n/ e ur ope a n- uni on- pbC B N F 76001/
2 T he S c hä ubl e – L a m e r s pa pe r i s a va i l a bl e ( i n G e r m a n) a t :
w w w .c duc s u.de / upl oa d/ s c ha e ubl e l a m e r s 94.pdf
3 A m or e r e c e nt a dvoc a t e of a t w o- s pe e d E ur ope , ba s i ng s om e of hi s
a r gum e nt s on t he e ur o, i s a f or m e r C ounc i l l e ga l a dvi s e r , J e a n- C l a ude
P i r i s , i n hi s book T he F ut ur e of E ur ope ( C a m br i dge U ni ve r s i t y P r e s s ,
2012) .
4 S e e “ C a n A nge l a M e r ke l hol d E ur ope t oge t he r ” , M a r c h 10t h 2011,
a va i l a bl e a t : w w w .e c onom i s t .c om / node / 18332786/
5 Q uot e d a t : w w w .e c onom i s t .c om / node / 3194456/
6 D a vi d C a m e r on’ s s pe e c h a t B l oom be r g i s a va i l a bl e a t :
w w w .gov .uk/ gove r nm e nt / s pe e c he s / e u- s pe e c h- a t – bl oom be r g
7 G e or ge O s bor ne ’ s s pe e c h t o O pe n E ur ope / F r e s h S t a r t c onf e r e nc e ,
J a nua r y 15t h 2014, a va i l a bl e a t :
w w w .gov .uk/ gove r nm e nt / s pe e c he s / e xt r a c t s – f r om – t he – c ha nc e l l or s –
s pe e c h- on- e ur ope
9 D e m o c r a c y a n d i t s d i s c o n t e n t s
1 T hi s s e c t i on dr a w s on t he a na l ys i s i n t w o books w i t h i de nt i c a l t i t l e s :
D e m oc r ac y i n E ur ope . O ne i s by L a r r y S i e de nt op ( A l l e n L a ne , 2000) ,
t he ot he r by V i vi e n S c hm i dt ( O xf or d U ni ve r s i t y P r e s s , 2006) .
2 S e e P e w G l oba l A t t i t ude s S ur ve y , M a y 2013, a va i l a bl e a t :
w w w .pe w gl oba l .or g/ 2013/ 05/ 13/ t he – ne w – s i c k- m a n- of – e ur ope – t he –
e ur ope a n- uni on/ ; a nd E ur oba r om e t e r , a t :
e c .e ur opa .e u/ publ i c _opi ni on/ a r c hi ve s / e b/ e b79/ e b79_publ _f r .pdf
3 G ue r ot , U . a nd K l a u, T ., A f t e r M e r k oz y : how F r anc e and G e r m any c an
m ak e E ur ope W or k , a va i l a bl e a t :
e c f r .e u/ pa ge / – / E C F R 56_F R A N C E _G E R M A N Y _B R I E F _A W .pdf

4 S e e , f or e xa m pl e :
w w w .gl oba l pos t .c om / di s pa t c h/ ne w s / r e gi ons / e ur ope / 130625/ e ur ope a n-
uni on- e a s t e r n- c e nt r a l – e ur ope – a c c e s s i on
5 R e por t s on t hi s i nc l ude :
w w w .t e l e gr a ph.c o.uk/ f i na nc e / f i na nc i a l c r i s i s / 10088005/ F r a nç oi s –
H ol l a nde – t e l l s – E ur ope a n- C om m i s s i on- i t – c a nt – di c t a t e – t o- F r a nc e .ht m l
6 S e e r e por t s on G e r r i t Z a l m , f or e xa m pl e a t :
w w w .e ur ope a nvoi c e .c om / a r t i c l e / i m por t e d/ c ol our f ul – m one y-
m a n/ 50233.a s px
7 G e r m a n c ons t i t ut i ona l c our t de c i s i on, J une 30t h 2009, a va i l a bl e a t :
w w w .bve r f g.de / e nt s c he i dunge n/ e s 20090630_2bve 000208.ht m l
8 S e e C E R pa pe r by H e a t he r G r a bbe a nd S t e f a n L e hne , a va i l a bl e a t :
w w w .c e r .or g.uk/ publ i c a t i ons / a r c hi ve / e s s a y/ 2013/ 2014- e ur ope a n-
e l e c t i ons – w hy- pa r t i s a n- c om m i s s i on- pr e s i de nt – w oul d- be – b ; a nd a l s o a
not e by C ha r l e s G r a nt , a va i l a bl e a t : w w w .c e r .or g.uk/ i n- t he – pr e s s / how –
r e duc e – e us – de m oc r a t i c – de f i c i t
9 I n hi s i na ugur a l l e c t ur e a t t he L ondon S c hool of E c onom i c s , R obe r t
C oope r a dvoc a t e d e l e c t i ng t he E ur ope a n C om m i s s i on. S e e :
w w w .l s e .a c .uk/ ne w s A ndM e di a / vi de oA ndA udi o/ c ha nne l s / publ i c L e c t ur
e s A ndE ve nt s / pl a ye r .a s px? i d= 1585
1 0 H o w t h e e u r o s p o i l t a n y o t h e r b u s i n e s s
1 T he C om m i s s i on pr opos a l s c a n be f ound a t :
e c .e ur opa .e u/ e ne r gy/ doc / 2030/ c om _2014_15_e n.pdf
2 T he e ve nt ua l t e xt of t he B ol ke s t e i n di r e c t i ve i s a va i l a bl e a t : e ur –
l e x.e ur opa .e u/ L e xU r i S e r v/ L e xU r i S e r v .do?
ur i = C E L E X : 32006L 0123: E N : H T M L
3 T he M ont i r e por t c a n be f ound a t :
e c .e ur opa .e u/ be pa / pdf / m ont i _r e por t _f i na l _10_05_2010_e n.pdf
4 Q uot e d i n t he C ha r l e m a gne c ol um n, O c t obe r 20t h 2012, s e e :
w w w .e c onom i s t .c om / ne w s / e ur ope / 21564851- e ur o- w a s – m e a nt –
unde r pi n- s i ngl e – m a r ke t – i t – m a y- e nd- up- unde r m i ni ng- i t
5 S e e P a s c oua u, Y ., T he F ut ur e of t he A r e a of F r e e dom , Se c ur i t y A nd
J us t i c e , E ur ope a n P ol i c y C e nt r e , B r us s e l s , J a nua r y 2014, a va i l a bl e a t :
w w w .e pc .e u/ pub_de t a i l s .php? c a t _i d= 1& pub_i d= 4092

1 1 E u r o p e ’ s p l a c e i n t h e w o r l d
1 S e e w w w .nyt i m e s .c om / 1991/ 06/ 29/ w or l d/ c onf l i c t – i n- yugos l a vi a –
e ur ope a ns – s e nd- hi gh- l e ve l – t e a m .ht m l
2 T hi s poi nt i s a l s o m a de i n T he U nc e r t ai n L e gac y of C r i s i s : E ur ope an
F or e i gn P ol i c y F ac e s t he F ut ur e by R i c ha r d Y oungs ( C a r ne gi e
E ndow m e nt f or I nt e r na t i ona l P e a c e , 2014) .
3 S e e “ D e f e nc e l e s s ? ” , C ha r l e m a gne c ol um n, D e c e m be r 21s t 2013,
a va i l a bl e a t : w w w .e c onom i s t .c om / ne w s / e ur ope / 21591880- a us t e r i t y-
hol l ow i ng- out – e ur ope s – a r m i e s – de f e nc e l e s s
4 T hi s l e d t o a n e s pe c i a l l y a c e r bi c s pe e c h by t he A m e r i c a n de f e nc e
s e c r e t a r y , R obe r t G a t e s , a va i l a bl e a t :
w w w .de f e ns e .gov/ s pe e c he s / s pe e c h.a s px? s pe e c hi d= 1581
5 F or one e xa m pl e of m e a s ur e s on B ul ga r i a n a nd R om a ni a n
i m m i gr a t i on, s e e : w w w .ukba .hom e of f i c e .gov .uk/ e uc i t i z e ns / bul ga r i a –
r om a ni a /
6 T he l a t e s t E ur ope a n C om m i s s i on r e por t on e nl a r ge m e nt t o T ur ke y i s
a va i l a bl e a t :
e c .e ur opa .e u/ e nl a r ge m e nt / pdf / ke y_doc um e nt s / 2013/ pa c ka ge / t r _r a ppo
r t _2013.pdf
7 I nf or m a t i on on t he E ur ope a n U ni on’ s e a s t e r n ne i ghbour hood pol i c y
c a n be f ound a t : w w w .e e a s .e ur opa .e u/ e np/ i nde x_e n.ht m
1 2 A f t e r t h e s t o r m
1 S c hä ubl e , W ., “ I gnor e t he D oom s a ye r s . E ur ope i s be i ng f i xe d” ,
F i nanc i al T i m e s , S e pt e m be r 16t h 2013, a va i l a bl e a t :
w w w .f t .c om / c m s / s / 0/ e 88c 842a – 1c 67- 11e 3- a 8a 3-
00144f e a b7de .ht m l #a xz z 2nqL 7S nR z
2 G r e e c e : E x P os t E v al uat i on of E x c e pt i onal A c c e s s unde r t he 2010
St and- B y A r r ange m e nt , I M F , J une 2013, a va i l a bl e a t :
w w w .i m f .or g/ e xt e r na l / pubs / f t / s c r / 2013/ c r 13156.pdf
3 F i s c al F e de r al i s m : U S H i s t or y f or A r c hi t e c t s of E ur ope ’ s F i s c al
U ni on” , by C . R a nda l l H e nni ng a nd M a r t i n K e s s l e r , B r ue ge l , J a nua r y
2012, a va i l a bl e a t : w w w .br ue ge l .or g/ publ i c a t i ons / publ i c a t i on-
de t a i l / publ i c a t i on/ 669- f i s c a l – f e de r a l i s m – us – hi s t or y- f or – a r c hi t e c t s – of –
e ur ope s – f i s c a l – uni on/

4 A good s um m a r y of t he f e de r a l a nd “ m ut ua l a s s ur a nc e ” m ode l s i s
pr ovi de d by J e a n P i s a ni – F e r r y i n a pa pe r ( i n F r e nc h) f or B r ue ge l ,
A s s ur anc e M ut ue l l e ou F é dé r al i s m e ? l a Z one E ur o e nt r e D e ux
M odè l e s , a va i l a bl e a t : w w w .br ue ge l .or g/ dow nl oa d/ pa r e nt / 757-
a s s ur a nc e – m ut ue l l e – ou- f e de r a l i s m e – l a – z one – e ur o- e nt r e – de ux-
m ode l e s / f i l e / 1623- a s s ur a nc e – m ut ue l l e – ou- f e de r a l i s m e – l a – z one – e ur o-
e nt r e – de ux- m ode l e s / . S om e of hi s vi e w s a r e s e t out i n E ngl i s h i n
s hor t e r f or m i n a n op- e d f or P r oj e c t S yndi c a t e , a va i l a bl e a t :
w w w .pr oj e c t – s yndi c a t e .or g/ c om m e nt a r y/ f e de r a l i s m – or – bus t – f or –
e ur ope – by- j e a n- pi s a ni – f e r r y
5 M ody , A ., A Sc hum an C om pac t f or t he E ur o A r e a, B r ue ge l , N ove m be r
29t h 2013, a va i l a bl e a t : w w w .br ue ge l .or g/ publ i c a t i ons / publ i c a t i on-
de t a i l / publ i c a t i on/ 802- a – s c hum a n- c om pa c t – f or – t he – e ur o- a r e a /
6 G l i e ni c ke r G r oup, “ T ow a r ds a E ur o U ni on” , op- e d i n D i e Z e i t ,
O c t obe r 17t h 2013, a va i l a bl e i n E ngl i s h vi a B r ue ge l a t :
w w w .br ue ge l .or g/ nc / bl og/ de t a i l / a r t i c l e / 1173- t ow a r ds – a – e ur o- uni on/
7 P our une C om m unaut é pol i t i que de l ’ e ur o, G r oupe E i f f e l E ur ope ,
F e br ua r y 2014. E ngl i s h ve r s i on a va i l a bl e a t :
w w w .br ue ge l .or g/ nc / bl og/ de t a i l / a r t i c l e / 1250- f or – a – e ur o- c om m uni t y/
8 A l l a r t , C . e t al ., T ow ar ds a F i s c al U ni on f or t he E ur o A r e a, I M F ,
S e pt e m be r 25t h 2013. P a pe r a nd t e c hni c a l not e s a va i l a bl e a t :
w w w .i m f .or g/ e xt e r na l / pubs / c a t / l ongr e s .a s px? s k= 40784
9 T he E ur ope a n C om m i s s i on l ooke d a t va r i ous opt i ons f or “ s t a bi l i t y
bonds ” i n N ove m be r 2011 ( e c .e ur opa .e u/ c om m i s s i on_2010-
2014/ pr e s i de nt / ne w s / doc um e nt s / pdf / gr e e n_e n.pdf ) . I n t he “ B l ue
B ond” pr opos a l f or B r ue ge l , J a kob von W e i z s ä c ke r a nd J a c que s
D e l pl a pr opos e d m ut ua l i s i ng a l l “ good” de bt up t o t he M a a s t r i c ht
t hr e s hol d of 60% of G D P ( w w w .br ue ge l .or g/ publ i c a t i ons / publ i c a t i on-
de t a i l / publ i c a t i on/ 403- t he – bl ue – bond- pr opos a l / ) . T he G e r m a n C ounc i l
of E c onom i c E xpe r t s pr opos e d i ns t e a d pool i ng “ ba d” de bt a bove t hi s
l e ve l i n a f und t o be pa i d of f ove r 20 ye a r s
( w w w .s a c hve r s t a e ndi ge nr a t –
w i r t s c ha f t .de / a kt ue l l e s j a hr s gut a c ht e n0.ht m l ) .
10 B ot h t he s e i de a s a r e pr opos e d i n H ow t o B ui l d a M ode r n E ur ope an
U ni on by C ha r l e s G r a nt a nd ot he r s ( C e nt r e f or E ur ope a n R e f or m ,
2013) .

11 C l a r k, C ., T he Sl e e pw al k e r s : H ow E ur ope W e nt t o W ar i n 1914, A l l e n
L a ne , 2012.
12 S i m m s , B ., T he St r uggl e f or Supr e m ac y : E ur ope f r om 1453 t o t he
P r e s e nt , A l l e n L a ne , 2013.

A p p e n d i c e s

Appendix 1
T i m e l i n e
F e br ua r y 1992 M a a s t r i c ht t r e a t y s i gne d
J une 1992 D e nm a r k s a ys no
S e pt e m be r 1992 E R M c r i s i s , U K pound a nd I t a l i a n l i r a
out
M a y 1993 D a ne s s a y ye s w i t h opt – out s
O c t obe r 1993 M a a s t r i c ht t r e a t y r a t i f i e d
J une 1997 S t a bi l i t y a nd G r ow t h P a c t s i gne d
J a nua r y 1999 E M U be gi ns w i t h 11 c ount r i e s
J a nua r y 2001 G r e e c e j oi ns E M U
J a nua r y 2002 E ur o not e s a nd c oi ns i nt r oduc e d
N ove m be r 2003 G e r m a ny a nd F r a nc e br e a c h s t a bi l i t y
pa c t . J e a n- C l a ude T r i c he t be c om e s E C B
pr e s i de nt
A ugus t 2007 E C B l i qui di t y i nj e c t i on be gi ns
S e pt e m be r 2008 L e hm a n B r ot he r s c ol l a ps e s
J a nua r y 2009 G r e e c e dow ngr a de d
N ove m be r 2009 N e w G r e e k gove r nm e nt a dm i t s t o
bi gge r budge t de f i c i t
M a y 2010 F i r s t G r e e k ba i l – out
O c t obe r 2010 D e a uvi l l e de a l on pr i va t e – s e c t or
i nvol ve m e nt

N ove m be r 2010 I r i s h ba i l – out
M a y 2011 P or t ugue s e ba i l – out
J ul y 2011 S e c ond G r e e k ba i l – out
A ugus t 2011 E C B buys I t a l i a n a nd S pa ni s h bonds
O c t obe r 2011 H a i r c ut on G r e e k de bt
N ove m be r 2011 G e or ge P a pa ndr e ou a nd S i l vi o
B e r l us c oni f or c e d out of of f i c e i n
G r e e c e a nd I t a l y r e s pe c t i ve l y . M a r i o
D r a ghi be c om e s E C B pr e s i de nt
D e c e m be r 2011 D r a ghi l a unc he s L T R O . F i s c a l c om pa c t
t r e a t y a gr e e d. M a r i a no R a j oy be c om e s
S pa i n’ s pr i m e m i ni s t e r
F e br ua r y 2012 R a j oy a dm i t s hi ghe r S pa ni s h budge t
de f i c i t
M a y 2012 F r a nç oi s H ol l a nde e l e c t e d F r e nc h
pr e s i de nt
J une 2012 P a r t i a l ba i l – out a gr e e d f or S pa ni s h
ba nks . A gr e e m e nt on ba nki ng uni on
J ul y 2012 D r a ghi gi ve s “ w ha t e ve r i t t a ke s ” s pe e c h
A ugus t 2012 E C B a gr e e s O M T pr ogr a m m e
O c t obe r 2012 A nge l a M e r ke l vi s i t s A t he ns
N ove m be r 2012 G r e e k de bt bur de n s pr e a d out , i nt e r e s t –
r a t e c ut
D e c e m be r 2012 E ur ope a n C ou nc i l r e j e c t s M a nue l
B a r r os o a nd H e r m a n V a n R om puy’ s
pl a ns f or gr e a t e r uni on
F e br ua r y 2013 I nde c i s i ve I t a l i a n e l e c t i on
M a r c h 2013 F i r s t C ypr us ba i l – out , ba nks s hut ,
r e vi s e d ba i l – out
A pr i l 2013 E nr i c o L e t t a be c om e s I t a l i a n pr i m e
m i ni s t e r
S e pt e m be r 2013 G e r m a n e l e c t i on. M e r ke l w i ns a nd

ne got i a t e s gr a nd c oa l i t i on
D e c e m be r 2013 I r e l a nd e xi t s ba i l – out pr ogr a m m e .
S i ngl e ba nk s upe r vi s or a gr e e d
J a nua r y 2014 L a t vi a j oi ns e ur o
F e br ua r y 2014 M a t t e o R e nz i be c om e s I t a l i a n pr i m e
m i ni s t e r

Appendix 2
T r e a t i e s , r e g u l a t i o n s a n d p a c t s
T r e a t y o f R o m e
T he f oundi ng ba s i s f or t he E ur ope a n E c onom i c C om m uni t y ( E E C ) a nd i t s
a s s oc i a t e d bodi e s . S i gne d i n R o m e by t he or i gi na l s i x c ount r i e s – F r a nc e ,
W e s t G e r m a ny , I t a l y , B e l gi um , t he N e t he r l a nds a nd L uxe m bour g – i n
M a r c h 1957.
S i n g l e E u r o p e a n A c t
T he l e ga l doc um e nt t ha t unde r pi ns t he 1992 s i ngl e m a r ke t by pr ovi di ng
f or m or e w i de s pr e a d us e of qua l i f i e d- m a j or i t y vot i ng. A gr e e d i n
L uxe m bour g i n D e c e m be r 1985 , s i gne d i n F e br ua r y 1986 a nd e nt e r e d i nt o
f or c e i n J ul y 1987.
M a a s t r i c h t t r e a t y
F or m a l l y t he T r e a t y on E ur ope a n U ni on. T he f oundi ng l e ga l doc um e nt f or
E ur ope a n e c ono m i c a nd m one t a r y uni on ( E M U ) , a gr e e d i n M a a s t r i c ht i n
D e c e m be r 1991, s i gne d i n F e br ua r y 1992 a nd r a t i f i e d i n O c t obe r 1993.
T he t r e a t y l a ys dow n f i ve “ c onve r ge nc e c r i t e r i a ” t o be f ul f i l l e d by
c a ndi da t e s t o j oi n E M U . D e nm a r k a nd t he U K w e r e gr a nt e d opt – out s f r om
s t a ge t hr e e , t he a dopt i on of a s i ngl e c ur r e nc y .
T r e a t y o f A m s t e r d a m
P r ovi de s t he l e ga l ba s i s f or j us t i c e a nd hom e a f f a i r s a nd f or a c om m on
f or e i gn a nd s e c ur i t y pol i c y t o be c om e pa r t of t he E U . A gr e e d i n

A m s t e r da m i n J une 1997 a nd e nt e r e d i nt o f or c e i n M a y 1999.
T r e a t y o f N i c e
C ha nge d t he vot i ng w e i ght s a nd s e ve r a l E U i ns t i t ut i ons i n pr e pa r a t i on f or
t he 2004 e nl a r ge m e nt t o t a ke i n t e n ne w m e m be r s , m a i nl y f r om c e nt r a l
a nd e a s t e r n E ur ope . A gr e e d i n N i c e i n D e c e m be r 2000 a nd e nt e r e d i nt o
f or c e i n F e br ua r y 2003.
T r e a t y o f L i s b o n
A f t e r t he E ur ope a n c ons t i t ut i ona l t r e a t y w a s r e j e c t e d by r e f e r e ndum s i n
2005 i n F r a nc e a nd t he N e t he r l a nds , i t s e s s e nt i a l e l e m e nt s w e r e s ubs um e d
i nt o t he L i s bon t r e a t y , w hi c h w a s s i gne d i n D e c e m be r 2007 a nd e nt e r e d
i nt o f or c e i n D e c e m be r 2009. T he t r e a t y c ha nge s t he vot i ng s ys t e m ,
e s t a bl i s he s a pe r m a ne nt pr e s i de nt of t he E ur ope a n C ounc i l a nd s e t s up a
ne w e xt e r na l a c t i on s e r vi c e unde r a hi gh r e pr e s e nt a t i ve f or f or e i gn pol i c y .
S t a b i l i t y a n d G r o w t h P a c t
A s e t of r e gul a t i ons a gr e e d i n 1 997 t o i m pos e budge t di s c i pl i ne on e ur o-
z one c ount r i e s , w i t h t he pos s i bi l i t y of s w i nge i ng f i ne s on t hos e w i t h
budge t d e f i c i t s o ve r 3% of G D P . A f t e r F r a nc e a nd G e r m a ny br o ke t he pa c t
i n 2 003–04, i t w a s s ubs um e d i nt o a ne w e xc e s s i ve de f i c i t s pr oc e dur e
know n a s t he s i x- pa c k ( s e e be l ow ) .
E u r o p e a n F i n a n c i a l S t a b i l i t y F a c i l i t y , E u r o p e a n S t a b i l i t y
M e c h a n i s m
T he E ur ope a n F i na nc i a l S t a bi l i t y F a c i l i t y ( E F S F ) w a s s e t up i n M a y 2010
a s a t e m por a r y ba i l – out f und f o r t he e ur o z one , us e d f i r s t f or G r e e c e . I t s
l e ndi ng c a pa c i t y w a s l a t e r r a i s e d t o €440 bi l l i on. I n 2012 i t w a s r e pl a c e d
by a pe r m a ne nt E ur ope a n S t a bi l i t y M e c ha ni s m ( E S M ) , ba s e d on a n i nt e r –
gove r nm e nt a l t r e a t y , w i t h a l e ndi ng c a pa c i t y i ni t i a l l y of €500 bi l l i on.
F i s c a l c o m p a c t t r e a t y

F or m a l l y know n a s t he T r e a t y on S t a bi l i t y , C o- or di na t i on a nd G ove r na nc e
i n t he E c onom i c a nd M one t a r y U ni on, t he f i s c a l c om pa c t w a s a gr e e d i n
D e c e m be r 2011 a nd e nt e r e d i nt o f or c e i n J a nua r y 2013. T he t r e a t y
c om m i t s s i gna t or i e s t o a m e nd na t i ona l l a w t o gua r a nt e e budge t ba l a nc e ,
de f i ni ng t hi s a s ke e pi ng c yc l i c a l l y a dj us t e d s t r uc t ur a l de f i c i t s be l ow 0.5%
of G D P . B e c a us e t he U K a nd t he C z e c h R e publ i c r e f us e d t o s i g n, t he t r e a t y
w a s a dopt e d a s a n i nt e r – gove r nm e nt a l one by 25 E U c ount r i e s .
S i x – p a c k , t w o – p a c k , E u r o P l u s P a c t
C om pl e m e nt i ng t he f i s c a l c om pa c t t r e a t y a r e r ul e s unde r t he “ e xc e s s i ve
de f i c i t s pr oc e du r e ” , a gr e e d i n 2011 a nd 2012. T he s i x- pa c k r e f e r s t o f i ve
r e gul a t i ons a nd a di r e c t i ve t o c ont r ol budge t de f i c i t s a nd m a c r oe c onom i c
i m ba l a nc e s ; t he t w o- pa c k t o pr ovi s i ons f or t he E ur ope a n C om m i s s i on t o
m oni t or a nd i f ne c e s s a r y r e qui r e a m e ndm e nt s t o na t i ona l budge t s . T he
vot i ng f or s a nc t i ons i s c ha ng e d f r om pos i t i ve t o ne ga t i ve qua l i f i e d
m a j or i t y: t ha t i s , i t now t a ke s a m a j or i t y of c ount r i e s t o r e j e c t r a t he r t ha n
a ppr ove pr opos a l s f r om t he C om m i s s i on. T he E ur o P l us P a c t , s i gne d by
s i x o t he r E U c o unt r i e s be s i de s t he e ur o z one , c onc e r ns br oa de r e c onom i c
c o- or di na t i on. C ol l e c t i ve l y t he s e pr ovi s i ons a r e know n a s t he “ E ur ope a n
s e m e s t e r ” .
B a n k i n g u n i o n
N e got i a t i ons on t he de t a i l s of ba nki ng uni on a r e c ont i nui ng, b ut a s i ngl e
s upe r vi s or y m e c ha ni s m ( S S M ) ha s be e n s e t up a nd a gr e e m e nt ha s be e n
r e a c he d on a s i ngl e r e s ol ut i on m e c ha ni s m ( S R M ) . T he f i r s t t r a ns f e r s
s upe r vi s i on of t he m os t i m por t a nt ba nks t o t he E ur ope a n C e nt r a l B a nk; t he
s e c ond s e t s out a r r a nge m e nt s f or m a na gi ng a ba nk f a i l ur e . T he s e a ppl y t o
e ur o- z one c ount r i e s a nd ot he r E U c ount r i e s t ha t c hoos e t o j o i n ( t he U K ,
t he C z e c h R e publ i c a nd S w e de n w i l l not do s o) . T he E ur ope a n B a nki ng
A ut hor i t y c ont i nue s t o gove r n a l l ba nks i n t he E U .

Appendix 3
F u r t h e r r e a d i n g
D e s pi t e t he e ur o’ s a nd t he E ur ope a n U ni on’ s r e l a t i ve yout h, t he r e i s a va s t
a m ount of l i t e r a t ur e on bot h. T he f oot not e s t o t he t e xt c i t e s e v e r a l s our c e s
t ha t ha ve be e n e s pe c i a l l y he l p f ul . B e l ow i s a l i s t of s om e books t ha t
r e a de r s m i ght w i s h t o c ons ul t .
A l m qvi s t , K . a nd L i nkl a t e r , A . ( e ds ) , T he P ur s ui t of E ur ope , A xe l a nd
M a r ga r e t A xs on J ohns on F ounda t i on, 2012
A ut he r s , J ., E ur ope ’ s F i nanc i al C r i s i s : A Shor t G ui de t o H ow t he E ur o F e l l
I nt o C r i s i s , and t he C ons e que nc e s f or t he W or l d, P e a r s on E duc a t i on,
2013
B a s t a s i n, C ., Sav i ng E ur ope : H ow N at i onal P ol i t i c s N e ar l y D e s t r oy e d t he
E ur o, B r ooki ngs I ns t i t ut i ons P r e s s , 2012
B oot h, P . ( e d.) , T he E ur o: t he B e gi nni ng, t he M i ddl e … and t he E nd?, I E A ,
2013
C a r s w e l l , S ., A ngl o R e publ i c , I ns i de t he B ank t hat B r ok e I r e l a nd, P e ngui n
I r e l a nd 2011
C or ne l i us , S ., A nge l a M e r k e l : T he A ut hor i s e d B i ogr aphy , A l m a B ooks ,
2013
C r a w f or d, A . a nd C z uc z ka , T ., A nge l a M e r k e l : A C hanc e l l or s h i p F or ge d i n
C r i s i s , W i l e y , 2013
D e G r a uw e , P ., E c onom i c s of M one t ar y U ni on, 9t h e di t i on, O xf or d
U ni ve r s i t y P r e s s , 2012
G a m m e l i n, C . a nd L öw , R ., E ur opas St r i ppe nz i e he r ( i n G e r m a n) , U l l s t e i n
B uc hve r l a ge B e r l i n, 2014

G oul a r d, S . a nd M ont i , M ., D e l a dé m oc r at i e e n E ur ope : V o i r pl us l oi n ( i n
F r e nc h) , F l a m m a r i on, 2012
H a be r m a s , J ., T he C r i s i s of t he E ur ope an U ni on: A R e s pons e , P ol i t y , 2012
H e i s e , M , E m e r gi ng f r om t he E ur ope D e bt C r i s i s , S pr i nge r , 2013
H e w i t t , G ., T he L os t C ont i ne nt , H odde r & S t ought on, 2013
I s s i ng, O ., T he B i r t h of t he E ur o, C a m br i dge U ni ve r s i t y P r e s s , 2008
J a m e s , H ., M ak i ng t he E ur ope an M one t ar y U ni on, H a r va r d U ni ve r s i t y
P r e s s , 2012
L e gr a i n, P ., E ur ope an Spr i ng: W hy O ur E c onom i c s and P ol i t i c s ar e i n a
M e s s – and H ow t o P ut T he m R i ght , C B B ooks ( A m a z on) , 2014
M a r s h, D ., E ur ope ’ s D e adl oc k , Y a l e U ni ve r s i t y P r e s s , 2013
M a r s h, D ., T he E ur o: t he B at t l e f or a N e w G l obal C ur r e nc y , Y a l e
U ni ve r s i t y P r e s s , upda t e d 2011
O ’ T ool e , F ., Shi p of F ool s : H ow St upi di t y a nd C or r upt i on Sank t he C e l t i c
T i ge r , F a be r a nd F a be r , 2009
P i s a ni – F e r r y , J ., T he E ur o C r i s i s and i t s A f t e r m at h, O xf or d U ni ve r s i t y
P r e s s , 2014
P a na gi ot a r e a , E ., G r e e c e i n t he E ur o, E C P R P r e s s , 2013
P r yc e , V ., G r e e k onom i c s , B i t e ba c k, upda t e d 2013
S or os , G ., T he T r age dy of t he E ur ope an U ni on, P ubl i c A f f a i r s , 2014
T s ouka l i s , L . a nd E m m a noui l i di s , J . ( e ds ) , T he D e l phi c O r ac l e on E ur ope ,
O xf or d U ni ve r s i t y P r e s s , 2011
T s ouka l i s , L ., T he U nhappy St at e of t he E ur ope an U ni on, P ol i c y N e t w or k,
M a r c h 2014
V a n M i dde l a a r , L ., T he P as s age t o E ur ope , Y a l e U ni ve r s i t y P r e s s , 2013

Appendix 4
H o w The Economist s a w i t a t t h e t i m e
M a y 1 s t – 7 t h 2 0 1 0

J u l y 1 0 t h – 1 6 t h 2 0 1 0
N o v e m b e r 2 0 t h – 2 6 t h 2 0 1 0

D e c e m b e r 4 t h – 1 0 t h 2 0 1 0
J a n u a r y 1 5 t h – 2 1 s t 2 0 1 1

M a r c h 1 2 t h – 1 8 t h 2 0 1 1
J u n e 1 1 t h – 1 7 t h 2 0 1 1

J u n e 2 5 t h – J u l y 1 s t 2 0 1 1
O c t o b e r 2 9 t h – N o v e m b e r 4 t h 2 0 1 1

N o v e m b e r 5 t h – 1 1 t h 2 0 1 1
N o v e m b e r 1 2 t h – 1 8 t h 2 0 1 1

N o v e m b e r 2 6 t h – D e c e m b e r 2 n d 2 0 1 1
F e b r u a r y 1 8 t h – 2 4 t h 2 0 1 2

M a r c h 3 1 s t – A p r i l 6 t h 2 0 1 2
M a y 1 9 t h – 2 5 t h 2 0 1 2

M a y 2 6 t h – J u n e 1 s t 2 0 1 2
J u l y 2 8 t h – A u g u s t 3 r d 2 0 1 2

A u g u s t 1 1 t h – 1 7 t h 2 0 1 2
N o v e m b e r 1 7 t h – 2 3 r d 2 0 1 2

M a r c h 2 3 r d – 2 9 t h 2 0 1 3
M a y 2 5 t h – 3 1 s t 2 0 1 3

S e p t e m b e r 1 4 t h – 2 0 t h 2 0 1 3
O c t o b e r 2 6 t h – N o v e m b e r 1 s t 2 0 1 3

J a n u a r y 4 t h – 1 0 t h 2 0 1 4

I n d e x

1974–75 gl oba l r e c e s s i on 10
A
a c c e s s i on t r e a t i e s 112
a c c ount a bi l i t y 125 – 129 , 162
A l l i a nc e of L i be r a l s a nd D e m oc r a t s f or E ur ope ( A L D E ) 130 – 131
A l ogos kouf i s , G e or ge 42
A m s t e r da m t r e a t y 11 1 – 112 , 193
A na s t a s i a de s , N i c os 2 , 86 – 88
A ngl o I r i s h B a nk 53
A ns i p, A nde r s 104
A r a b s pr i ng 145 – 146
A r ge nt i na 5 , 50
A r m e ni a 149
A s ht on, C a t he r i ne 28 , 43 , 144
A s m us s e n, J ör g 51 , 82
A us t r i a 11 1 , 127
i nf l ue nc e 108
i nt e r e s t r a t e s 93
A z e r ba i j a n 149
A z na r , J os é M a r i a 17
B
B a ge hot , W a l t e r 9
ba i l – i n r ul e s 83 , 90 – 91 , 165
s e e al s o C ypr us
ba i l – out s
na t i ona l a ppr ova l r e qui r e m e nt 127
no- ba i l – out r ul e 45 , 162 , 163 – 165
B a l ka ns w a r 143
B a nk of C ypr us 86 – 87
B a nk of E ngl a nd 47 , 157

ba nk r e c a pi t a l i s a t i on 58 – 59 , 74 – 77 , 84
B a nki a 72
ba nki ng s e c t or c ha r a c t e r i s t i c s 35
ba nki ng s upe r vi s i on s e e f i na nc i a l s upe r vi s i on
ba nki ng uni on 23 , 74 – 75 , 77 , 83 – 85 , 90 – 92 , 106 , 165 , 195
s e e al s o de pos i t gua r a nt e e s ; f i na nc i a l s upe r vi s i on
B a r ni e r , M i c he l 41 , 138
B a r r os o, J os é M a nue l
e a r l y da ys of c r i s i s 41
E ur ope a n C om m i s s i on 97 , 98 , 141 , 172
G r e e c e 3 , 78
I t a l y 63
B a t i s t a , P a ul o N ogue i r a 46
B e l a r us 149
B e l gi um 17 , 100 , 127
B e r l us c oni , S i l vi o
e ur o c ur r e nc y vi e w 151
I t a l y’ s f a i l ur e t o r e f or m 59 , 60 , 62 – 63
P e opl e of F r e e dom pa r t y ( P dL ) 107
r e s i gna t i on 64
B l a c k W e dne s da y 16 – 17
B l a i r , T ony 28 , 112
B N P P a r i ba s 40
B ol ke s t e i n di r e c t i ve 137
bond yi e l ds 37 , 38 , 61 , 70 , 89
bond s pr e a ds 37 , 42 , 70 , 80 , 88
B oot l e , R oge r 1
B ow l e s , S ha r on 98 , 129
B r a ndt , W i l l y 10
B r e t t on W oods 9 – 10
B r ow n, G or don 24 , 41 , 48 , 102 , 112 , 144
B r ue ge l t hi nk- t a nk 35 , 74 , 163 , 166
budge t de f i c i t s
M a a s t r i c ht c e i l i ng 15
t i m e s c a l e s f or m e e t i ng t a r ge t s 88 – 89
s e e al s o s t a bi l i t y a nd gr ow t h pa c t

budge t s
a nnua l , E ur ope a n 21 , 27 , 118
c e nt r a l 13 , 168 – 170
f e de r a l 164 , 168
f i s c a l c a pa c i t y 84
B ul ga r i a 108 , 113 , 124 , 126 , 147
B unde s ba nk 16 , 23 , 157
C
C a m e r on, D a vi d 14 , 17 , 64 – 65 , 117 – 119 , 132 , 140
C a nne s G 20 s um m i t ( 2011) 62 – 64
C a pi t a l E c onom i c s 1
C a s s i s de D i j on j udgm e nt 21
C a t a l oni a 178
C E B S ( C om m i t t e e of E ur ope a n B a nki ng S upe r vi s or s ) 35
c e nt r a l ba nks , na t i ona l 22 – 23
C e nt r e f or E ur ope a n P ol i c y S t udi e s 34
C e nt r e f or E ur ope a n R e f or m 34
C F S P ( C om m on F or e i gn a nd S e c ur i t y P ol i c y) 142 , 144
C hi na 33 , 139 , 167
C hi r a c , J a c que s 18 , 23 , 100 , 127
C hr i s t of i a s , D e m e t r i s 86
C hur c hi l l , W i ns t on 7 , 115 , 161
C l a r k, C hr i s t ophe r 178
c l i m a t e c ha nge 135 – 136
C l i nt on, H i l l a r y 144
C oc kf i e l d, A r t hur 13
C om m i t t e e of E ur ope a n B a nki ng S upe r vi s or s ( C E B S ) 35
C om m i t t e e of P e r m a ne nt R e pr e s e nt a t i ve s ( C O R E P E R ) 20
C om m i t t e e of R e gi ons 21
c om m on f i s he r i e s pol i c y 100 , 138
C om m on F or e i gn a nd S e c ur i t y P ol i c y ( C F S P ) 142 , 144
c om m uni t y m e t hod 19 , 21 – 22
C om pe t i t i ve ne s s P a c t s e e E ur o P l us P a c t
c om pl a c e nc y pr e – c r i s i s 36 – 37

C ons t â nc i o, V í t or 34
c ons t i t ut i on pr opos a l s 26 – 27
c onve r ge nc e c r i t e r i a 14 – 16 , 41 , 112 , 193
C O R E P E R ( C om m i t t e e of P e r m a ne nt R e pr e s e nt a t i ve s ) 20
C O S A C ( C onf e r e nc e of C om m uni t y a nd E ur ope a n A f f a i r s C om m i t t e e s of
P a r l i a m e nt s of t he E ur ope a n U ni on) 133
C ounc i l of M i ni s t e r s 20 , 121 , 130
C ounc i l of t he E ur ope a n U ni on s e e C ounc i l of M i ni s t e r s
C our t of A udi t or s 21
C our t of F i r s t I ns t a nc e 21
C r a f t s , N i c hol a s 9
c r e di t r a t i ngs ( c ount r i e s ) 69 , 77 – 78 , 108
C r i m e a 150
C r oa t i a 113 , 143 , 147
c ur r e nt – a c c ount ( i m ) ba l a nc e s 25 , 31 , 88 – 89 , 167 – 168
c us t om s uni on, G e r m a n 9
C ypr us
a c c e s s i on 147
ba i l – out 2 , 85 – 88
e nt r y t o e ur o 112
f i na nc e s pr e – c r i s i s 30
C ypr us P opul a r B a nk ( L a i ki ) 86 – 88
C z e c h R e publ i c 113 , 118
D
D a yt on a gr e e m e nt 143
de G a ul l e , C ha r l e s 9 , 22 , 96
de L a r os i è r e , J a c que s 41 , 74
D e a uvi l l e m e e t i ng be t w e e n S a r koz y a nd M e r ke l 51 – 52 , 102
de bt m ut ua l i s a t i on 74 , 103 , 166 – 167
de f e nc e a nd s e c ur i t y 8 , 143 , 145
de f l a t i on 92
D e l or s , J a c que s 11 , 37 , 97
D e l pl a , J a c que s 167
de m oc r a t i c a c c ount a bi l i t y 125 – 129 , 162

de m oc r a t i c de f i c i t 121 , 129 – 132 , 162 – 163 , 171 – 172
D e nm a r k
E ur ope a n pa r t i c i pa t i on 112
j us t i c e a nd hom e a f f a i r s ( J H A ) 11 1 , 139
m i ni s t e r i a l a c c ount a bi l i t y 133
opt – out s 139
r e f e r e ndum s 16 , 27 , 132
s ha dow i ng of e ur o 113
s i ngl e c ur r e nc y opt – out 110 , 115
U K s ym pa t hi e s 119
de pos i t gua r a nt e e s 5 , 40 – 41 , 74 , 77 , 91
D e ut s c hm a r k 10 , 12 , 16
de va l ua t i on, i nt e r na l 31 , 65 – 66
D e xi a 72
D i j s s e l bl oe m , J e r oe n 24 , 87
doubl e m a j or i t y vot i ng 20 , 114
D r a ghi , M a r i o 156
a ppoi nt m e nt a s E C B pr e s i de nt 23 , 68
c r i s i s – m a na ge m e nt t e a m 2
de m a nd f or f i s c a l c om pa c t 64
L ong T e r m R e f i na nc i ng O pe r a t i ons ( L T R O ) 68 – 70
out r i ght m one t a r y t r a ns a c t i ons ( O M T ) 78 – 81
pr e s s ur e on B e r l us c oni 59
“ w ha t e ve r i t t a ke s ” L ondon s pe e c h 79
D ui s e nbe r g, W i m 23
E
e – c om m e r c e 137
e a s t –w e s t di vi de 108
E C B ( E ur ope a n C e nt r a l B a nk)
bond- buyi ng 47 – 49 , 59 – 60
c r i s i s – m a na ge m e nt pl a nni ng 2 , 4
de l a ys 156
E ur ope a n S ys t e m of C e nt r a l B a nks 22
l i qui di t y pr ovi s i on 40 – 42 , 68 – 70

out r i ght m one t a r y t r a ns a c t i ons ( O M T ) 79 – 81 , 164 , 175 – 176
r ol e a nd f unc t i on 22 – 24 , 39 – 40 , 170 – 171
s upe r vi s i on 6 , 99 , 175 , 195
t r oi ka m e m be r s hi p 160 – 161
E c oF i n m e e t i ngs 20 , 114
E c onom i c a nd F i na nc i a l C om m i t t e e 20
e c onom i c a nd m one t a r y uni on ( E M U ) 11 , 112
E c onom i c a nd S oc i a l C om m i t t e e 21
e c onom i c i m ba l a nc e s 30 – 34
T he E c onom i s t
on E C B r e s pons i bi l i t i e s 15
f i c t i t i ous m e m or a ndum t o A nge l a M e r ke l 1
E C S C ( E ur ope a n C oa l a nd S t e e l C om m uni t y) 7 – 8
E E A S ( E ur ope a n E xt e r na l A c t i on S e r vi c e ) 142 , 144
E E C ( E ur ope a n E c onom i c C om m uni t y) 8
E F S F ( E ur ope a n F i na nc i a l S t a bi l i t y F a c i l i t y) 26 , 48 , 55 , 60 – 61 , 81 , 194
s e e al s o E S M ( E ur ope a n S t a bi l i t y M e c ha ni s m )
E F S M ( E ur ope a n F i na nc i a l S t a bi l i s a t i on M e c ha ni s m ) 48
E i f f e l gr oup 120 , 129 , 164
e l e c t i ons , E ur ope a n 121 , 129 – 130
E l ys é e t r e a t y 100
e m i s s i ons – t r a di ng s c he m e ( E T S ) 135 – 136
E M S ( E ur ope a n M one t a r y S ys t e m )
c r e a t i on of 11
e xc ha nge – r a t e m e c ha ni s m 16
m e m be r s hi p 15
E M U ( e c onom i c a nd m one t a r y uni on) 11 , 112
E M U @ 10 36
e ne r gy pol i c i e s 136
e nha nc e d c o- ope r a t i on 11 1
e nl a r ge m e nt 33 , 146 – 147
e nvi r onm e nt s um m i t s 135
E r doga n, R e c e p T a yyi p 148
E S M ( E ur ope a n S t a bi l i t y M e c ha ni s m ) 194
e s t a bl i s hm e nt 26 , 55 , 80 – 81
ope r a t i ons 58 , 75 , 76 , 91

E s t oni a 65 , 108
E T S ( e m i s s i ons – t r a di ng s c he m e ) 135 – 136
E U 2020 s t r a t e gy 137
e ur o
br e a k- up c ont i nge nc y pl a ns 2 – 3
c onve r ge nc e c r i t e r i a 14 – 16 , 41 , 112 , 193
c r a s h da nge r 47 – 48
i nt r oduc t i on of 4 , 18
not e s a nd c oi ns 18
s pe c i a l c i r c um s t a nc e s 3 – 4
e ur o c r i s i s
e f f e c t on w or l d i nf l ue nc e 143 – 146
e r r or s 155 – 161
f oc us of a t t e nt i on 135 – 141
E ur o P l us P a c t 55 , 195
e ur o z one 4
e c onom i c da nge r s 175 – 178
i nc r e a s i ng s i gni f i c a nc e of i ns t i t ut i ons 113 – 114 , 120
pe r f or m a nc e c om pa r e d w i t h U S 154 – 155
pol i t i c a l da nge r s 175 – 178
pol i t i c a l i nt e gr a t i on 125
t r us t 173
E ur obonds 54 , 59 , 74 , 166 – 167
E ur ogr oup of f i na nc e m i ni s t e r s 24 , 114
E ur ope a n B a nki ng A ut hor i t y 114 , 195
E ur ope a n C e nt r a l B a nk ( E C B )
bond- buyi ng 47 – 49 , 59 – 60
c r i s i s – m a na ge m e nt pl a nni ng 2 , 4
de l a ys 156
E ur ope a n S ys t e m of C e nt r a l B a nks 22
l i qui di t y pr ovi s i on 40 – 42 , 68 – 70
out r i ght m one t a r y t r a ns a c t i ons ( O M T ) 79 – 81 , 164 , 175 – 176
r ol e a nd f unc t i on 22 – 24 , 39 – 40 , 170 – 171
s upe r vi s i on 6 , 99 , 175 , 195
t r oi ka m e m be r s hi p 160 – 161
E ur ope a n C oa l a nd S t e e l C om m uni t y ( E C S C ) 7 – 8

E ur ope a n C om m i s s i on
c om m i s s i one r s 19 , 172
e r r or s 160
f ut ur e di r e c t i on 171 – 172
i nf l ue nc e a nd pow e r 96 – 97 , 99 , 119 , 125
i nt r us i ve ne s s 127 , 140 – 141
or ga ni s a t i on 19
pr e s i de nc y 131 , 144
pr opos a l s f or e c onom i c gove r na nc e 50
E ur ope a n C om m uni t y 12
E ur ope a n C ounc i l 20 , 98 – 99
E ur ope a n C our t of H um a n R i ght s 21
E ur ope a n C our t of J us t i c e 21
E ur ope a n D e f e nc e C om m uni t y 8
E ur ope a n E c onom i c C om m uni t y ( E E C ) 8
E ur ope a n E xt e r na l A c t i on S e r vi c e ( E E A S ) 142 , 144
E ur ope a n F i na nc i a l S t a bi l i s a t i on M e c ha ni s m ( E F S M ) 48
E ur ope a n F i na nc i a l S t a bi l i t y F a c i l i t y ( E F S F ) 26 , 48 , 55 , 60 – 61 , 81 , 194
s e e al s o E ur ope a n S t a bi l i t y M e c ha ni s m ( E S M )
E ur ope a n F i na nc i a l S t a bi l i t y M e c ha ni s m 26
s e e al s o E ur ope a n S t a bi l i t y M e c ha ni s m ( E S M )
E ur ope a n I nve s t m e nt B a nk 21
E ur ope a n M one t a r y I ns t i t ut e 22
E ur ope a n M one t a r y S ys t e m ( E M S )
c r e a t i on of 11
e xc ha nge – r a t e m e c ha ni s m 16
m e m be r s hi p 15
E ur ope a n P a r l i a m e nt 20 – 21 , 97 – 98 , 99 , 100 , 119 , 121 , 129 – 132 , 171
E ur ope a n P e opl e ’ s P a r t y 117 , 127 , 130 – 131
E ur ope a n P ol i t i c a l C o- ope r a t i on 142
E ur ope a n s e m e s t e r 25 , 195
E ur ope a n S t a bi l i t y M e c ha ni s m ( E S M ) 194
e s t a bl i s hm e nt 26 , 55 , 80 – 81
ope r a t i ons 58 , 75 , 76 , 91
E ur ope a n S ys t e m i c R i s k B oa r d 41
E ur ope a n U ni on

dr i vi ng f or c e s f or m one t a r y uni on 12 – 13
e xpa ns i on 26
hi s t or i c a l ba c kgr ound 7 – 12
t r e a t y m a ki ng 26 – 28
w or l d i nf l ue nc e 140 , 142 – 150
E ur ope a n U ni on A c t ( 2011) 117 , 132
E ur os c e pt i c s 13 , 123
F i nns P a r t y 124
J obbi k 125
L e a gue of C a t hol i c F a m i l i e s 125
N a t i ona l F r ont 124
P a r t y of F r e e dom ( P dL ) 124
U K I nde pe nde nc e P a r t y ( U K I P ) 118 , 125 , 140
e xc e s s i ve de f i c i t pr oc e dur e 24 , 88 – 89 , 194 , 195
e xc ha nge – r a t e s ys t e m s 3 , 9 – 11
e xc ha nge r a t e s 164
F
F a r a ge , N i ge l 98 , 118
F e de r a l D e pos i t I ns ur a nc e C or por a t i on ( F D I C ) 77
F e de r a l R e s e r ve ( U S ) 23 , 47 , 48 , 157
f e de r a l i s m 19 , 110 , 116 , 161 – 165 , 168 – 170 , 177 – 178
f i na nc i a l i nt e gr a t i on 35 – 36
f i na nc i a l s upe r vi s i on 195
E C B 6 , 99 , 175 , 195
J a c que s de L a r os i è r e pr opos a l s 41
na t i ona l 23 , 35
s i ngl e s upe r vi s or 76 – 77 , 83 – 84 , 90
F i nl a nd
a c c e s s i on 26 , 11 1
F i nns P a r t y 124
i nf l ue nc e 108
m i ni s t e r i a l a c c ount a bi l i t y 133
f i s c a l c a pa c i t y 84
f i s c a l c om pa c t t r e a t y 25 – 26 , 64 – 65 , 118 , 194 – 195

f i s c a l pol i c y , f oc us on 30 – 31
F i ve S t a r M ove m e nt 124 , 126
f i xe d e xc ha nge – r a t e s ys t e m s 3 , 9 – 10
F oot , M i c ha e l 116
f or e c a s t s , gr ow t h 92
f or e i gn pol i c y 142 – 143
F ouc he t pl a n 22
F r a nc e
c r e di t r a t i ng 69 , 103
c ur r e nt – a c c ount ba l a nc e 168
E M S e xc ha nge – r a t e m e c ha ni s m 16
e xc e s s i ve de f i c i t pr oc e dur e 89
G D P gr ow t h 32
a nd G r e e c e 44
i nf l ue nc e 100 – 104 , 142 – 143
M a a s t r i c ht de a l 12 , 16
publ i c de bt 159
publ i c opi ni on of E U 123 , 124
s i ngl e c ur r e nc y vi e w s 16 – 17
une m pl oym e nt 159
ve t o of U K e nt r y 115
vot e t o bl oc k E ur ope a n D e f e nc e C om m uni t y 8
f r e e dom s of m ove m e nt 8 , 13
G
G a ul l e , C ha r l e s de 9 , 22 , 96
G a z pr om 136
G D P gr ow t h 32
G e or gi a 149
G e r m a ny
2013 e l e c t i ons 90 , 106 , 125
bond yi e l ds 37 , 89
B unde s ba nk 16 , 23 , 157
c ons t i t ut i ona l ( K a r l s r uhe ) c our t 45 , 95 , 128 , 158
c r e di t r a t i ng 69 , 77 – 78

c r i s i s m a na ge m e nt e r r or s 155 – 156
c ur r e nt – a c c ount s ur pl us 89 , 105 , 167 – 168
de m a nds pos t G r e e k ba i l – out 50 – 51
e c onom i c s t r e ngt hs a nd w e a kne s s e s 14
G D P gr ow t h 32
a nd G r e e c e 44
i nf l ue nc e 100 – 106
M a a s t r i c ht de a l 12 , 15 – 16
na t i ona l c ont r ol a nd a c c ount a bi l i t y 128 , 133
pa r l i a m e nt a r y s e a t s 100
pol i t i c a l pa r t i e s 93 , 125
publ i c de bt 159
publ i c opi ni on of E U 123
une m pl oym e nt 159
uni f i c a t i on 16
Z ol l ve r e i n 9
G i s c a r d d’ E s t a i ng, V a l é r y 11 , 18 , 26 , 100
G l i e ni c ke r gr oup 163 , 170
gol d s t a nda r d 9 – 10
G ol de n D a w n 124
gove r nm e nt s pe ndi ng ( w or l dw i de ) 4
gove r nm e nt s , i ns ol ve nc y of 50
gr e a t m ode r a t i on 31
G r e e c e
2012 e l e c t i on 73 , 126
ba i l – out de a l 45 – 47 , 56 – 58 , 65 – 67 , 70 , 158
bond yi e l ds 37 , 61 – 62
c ur r e nt – a c c ount ba l a nc e 168
de bt c r i s i s 42 – 45
e ur o m e m be r s hi p 18 , 112 , 115
f i na nc e s pos t ba i l – out 93 – 94
f i na nc e s pr e – c r i s i s 30 , 71
G D P gr ow t h 32
pot e nt i a l e ur o e xi t 1 – 5 , 81 – 83
publ i c de bt 159 , 166
publ i c opi ni on of E U a nd e ur o 113 , 123 , 124

r e f e r e ndum on ba i l – out 2 , 61 – 62
une m pl oym e nt 159
G r os , D a ni e l 34
H
H a gue , W i l l i a m 151
H a i de r , J ör g 127
H a m i l t on, A l e xa nde r 162 , 167
H e a t h, E dw a r d 10 , 116
H e i s bour g, F r a nç oi s 104
H ol l a nde , F r a nç oi s 73 – 74 , 89 , 103 – 104 , 127
pr opos e d r e f or m s 177
H unga r y 41 , 113 , 126 , 147
H ypo R e a l E s t a t e 41
I
I c e l a nd 53 , 147
i de ol ogi c a l di f f e r e nc e s 114 – 115
I K B D e ut s c he I ndus t r i e ba nk 40
i m m i gr a t i on 139 – 140 , 146 , 147
i m pos s i bl e t r i ni t y 13
i nt e r – gove r nm e nt a l i s m 96 , 128 , 174
i nt e r e s t r a t e s 93 , 164
i nt e r na l de va l ua t i on 31 , 65 – 66
I nt e r na t i ona l M one t a r y F und ( I M F )
ba nki ng uni on 74
c r i s i s – m a na ge m e nt pl a nni ng 2 , 4 – 5
C ypr us 86 – 87
e r r or s 160 – 161
e ur o z one s uppor t 48
G r e e c e 44 – 46 , 56 – 57 , 66 , 83 , 93 – 95 , 160
L a t vi a 65
r a i ny- da y f unds 169 – 170
s pe c i a l dr a w i ng r i ght s ( S D R ) 63
I r a q 143

I r e l a nd 89 , 110
ba i l – out 53 – 54 , 56 , 57 , 89
ba nk c r i s e s 40 , 71
bond yi e l ds 37 , 47 , 53 , 61 , 89
c ur r e nt – a c c ount ba l a nc e 168
f i na nc e s pr e – c r i s i s 30
G D P gr ow t h 32
i nf l ue nc e 107
opt – out s 11 1 , 139
publ i c de bt 159 , 166
publ i c opi ni on of E U 123
r e f e r e ndum s 27 , 28 , 132
une m pl oym e nt 159
I t a l y
2013 e l e c t i ons 107 , 124 , 126
bond yi e l ds 37 , 61 , 89
c onve r ge nc e c r i t e r i a 17
c ur r e nt – a c c ount ba l a nc e 168
da nge r of c ol l a ps e 59
E M S e xc ha nge – r a t e m e c ha ni s m 16
e xc e s s i ve de f i c i t pr oc e dur e 89
G D P gr ow t h 32
i nf l ue nc e 100 , 104 , 107
i nt e r e s t r a t e s 93
publ i c de bt 159 , 166
publ i c opi ni on of E U 123
s i ngl e c ur r e nc y vi e w s 17
une m pl oym e nt 159
J
J e nki ns , R oy 11
J obbi k 125
J unc ke r , J e a n- C l a ude 98 , 104 , 177
c a ndi da t e f or C om m i s s i on P r e s i de nc y 131
E U 2005 budge t c r i s i s 28

E ur obonds 54
E ur ogr oup pr e s i de nt 24
j us t i c e a nd hom e a f f a i r s ( J H A ) 139
K
K a r a m a nl i s , K os t a s 42
K a r l s r uhe c ons t i t ut i ona l c our t 45 , 95 , 128 , 158
K a ude r , V ol ke r 105
K e r r y , J ohn 144
K ohl , H e l m ut 12 , 18 , 100
L
l a bour m a r ke t s 14 , 33 – 34
L a ga r de , C hr i s t i ne 51 , 58 , 62 , 92
L a i ki 86 – 88
L a m e r s , K a r l 11 1
L a m ont , N or m a n 17
L a r os i è r e , J a c que s de 41 , 74
L a t i n M one t a r y U ni on 9
L a t vi a 41 , 65 , 67 , 88 , 108
L a w s on, N i ge l 16
L e a gue of C a t hol i c F a m i l i e s 125
l e gi s l a t i ve pa t h 21 – 22
L e hm a n B r ot he r s , E C B r e a c t i on t o c ol l a ps e 4
L e t t a , E nr i c o 107 – 108
L i bya 143 , 145
L i ps ky , J ohn 57
L i s bon t r e a t y 28 , 45 , 194
f or e i gn pol i c y 142
i ns t i t ut i ons 20 , 131
j us t i c e a nd hom e a f f a i r s ( J H A ) 139
s ubs i di a r i t y 133
vot i ng 20 , 114
L i t hua ni a 88 , 113 , 153
L ong T e r m R e f i na nc i ng O pe r a t i ons ( L T R O ) 68 – 70 , 72

L uxe m bour g 77 – 78 , 100 , 108 , 169
L uxe m bour g c om pr om i s e 97
M
M a a s t r i c ht t r e a t y 11 – 12 , 15 , 22 , 142 , 193
opt – out s a nd r e f e r e ndum s 16 , 110 – 11 1
M a c D ouga l l r e por t ( 1977) 13 , 169
M a j or , J ohn 12 , 11 1 , 116
M a l t a 100 , 112
M a r oni , R obe r t o 34
M a ye r , T hom a s 1
M c C r e e vy , C ha r l i e 41
M E P s 20 – 21 , 130
M e r ke l , A nge l a
2013 r e – e l e c t i on 90
ba nki ng uni on 74 – 77
C a nne s G 20 s um m i t ( 2011) 63 – 64
c r i s i s r e s pons e 40 – 41 , 44
E ur ope a n c ons t i t ut i on 28
f i c t i t i ous m e m or a ndum t o 1
f ut ur e di r e c t i on 178
pow e r a nd i nf l ue nc e 89 , 102 – 106 , 153
S a r koz y c ol l a bor a t i on 60 , 61 – 62 , 102 – 103
s uppor t f or C ypr us 86
s uppor t f or G r e e c e 5 , 45 , 49 – 52 , 81 – 82
s uppor t f or U K 118 – 119
uni on m e t hod 22 , 128
vot e r s uppor t 125
M e s s i na c onf e r e nc e 8 , 115
m i gr a t i on 139 – 140 , 146 , 147
M i l i ba nd, D a vi d 144
M i t t e r r a nd, F r a nç oi s 11 , 12 , 18 , 100
M ody , A s hoka 163
M ol dova 149
M onne t , J e a n 8 , 152

M ont e bour g, A r na ud 104
M ont e ne gr o 147
M ont i , M a r i o 64
i nf l ue nc e 70 , 75 – 76 , 107
A N e w St r at e gy f or t he Si ngl e M ar k e t ( 2010) 137 – 138
M or oc c o 146
M or r i s on, H e r be r t 8
M or s i , M uha m m a d 145
M os c ovi c i , P i e r r e 75
m ul t i – a nnua l f i na nc i a l f r a m e w or k 21 , 27 , 118
M unde l l , R obe r t 12 – 13
m ut ua l i s a t i on of de bt 74 , 103 , 166 – 167
N
na t i ona l budge t s 89 , 125
N a t i ona l F r ont 124
N A T O
de f e nc e s pe ndi ng t a r ge t s 145
E ur ope a n s e c ur i t y 8
m e m be r s hi p 110
N e t he r l a nds
c r e di t r a t i ng 77 – 78
e xc e s s i ve de f i c i t pr oc e dur e 89
i nf l ue nc e 100 , 108
m i ni s t e r i a l a c c ount a bi l i t y 133
U K s ym pa t hi e s 119
N i c e t r e a t y 194
no- ba i l – out r ul e 45 , 162 , 163 – 165
nor t h–s out h di vi de 33 – 34 , 108
N or t he r n R oc k 40
not e s a nd c oi ns 18
N ouy , D a ni è l e 90
N ul a nd, V i c t or i a 149
O

O ba m a , B a r a c k 63
of f i c i a l s e c t or i nvol ve m e nt ( O S I ) 83
O M T ( out r i ght m one t a r y t r a ns a c t i ons ) 79 – 81 , 164 , 175 – 176
G e r m a ny’ s c ons t i t ut i ona l c our t j udgm e nt 95 , 128
opt i m a l c ur r e nc y- a r e a t he or y 12 – 13 , 14 – 15
O r ba n, V i kt or 126
O s bor ne , G e or ge 117 , 119
O S I ( of f i c i a l s e c t or i nvol ve m e nt ) 83
out r i ght m one t a r y t r a ns a c t i ons ( O M T ) 79 – 81 , 164 , 175 – 176
G e r m a ny’ s c ons t i t ut i ona l c our t j udgm e nt 95 , 128
P
P a c t f or t he E ur o s e e E ur o P l us P a c t
P a pa c ons t a nt i nou, G e or ge 43
P a pa de m os , L uc a s 64
P a pa ndr e ou, G e or ge 56 , 60
e l e c t i on 43
G r e e k r e f e r e ndum 61 – 62
r e s i gna t i on 2 , 64
P a r t y of F r e e dom 124
P ol a nd 109 , 113
P ol i c y E xc ha nge 1
pol i t i c a l pa r t i e s 124 – 125 , 139 – 140
pol i t i c a l uni on 10 , 12 , 133 – 134
P om pi dou, G e or ge s 10
P oos , J a c que s 143
P or t uga l 110
ba i l – out 54 , 57 , 89 – 90
bond yi e l ds 37 , 47 , 53 , 61 , 89
publ i c opi ni on of E U a nd e ur o 113
pow e r , ba l a nc e of 99 – 101
pr i c e s t a bi l i t y goa l of E C B 23
pr i va t e – s e c t or i nvol ve m e nt ( P S I ) i n de bt r e s t r uc t ur i ng 51 – 52
P r odi , R om a no 17 , 25 , 97
P r ogr e s s i ve A l l i a nc e of S oc i a l i s t s a nd D e m oc r a t s ( S & D ) 130 – 131

publ i c de bt 15 , 158 – 159 s e e al s o s ove r e i gn de bt
publ i c opi ni on of E U a nd e ur o 121 – 124
P ut i n, V l a di m i r 149 – 150
Q
qua l i f i e d- m a j or i t y vot i ng 13 , 20 , 99 , 121
ne ga t i ve qua l i f i e d- m a j or i t y vot i ng 25 , 195
qua nt i t a t i ve e a s i ng ( Q E ) 47 , 15
R
R a j oy , M a r i a no 70 , 75 – 76 , 127
r e c a pi t a l i s a t i on, ba nk 58 – 59 , 74 – 77 , 84
r e de nom i na t i on 3 – 4 , 153 – 154 , 175
R e di ng, V i vi a ne 139
r e f e r e ndum s 27 , 28 , 121 – 122 , 132
R E F I T i ni t i a t i ve 172
R e gl i ng, K l a us 26
R e nz i , M a t t e o 107 – 108
r e s c ue f und s e e E ur ope a n S t a bi l i t y M e c ha ni s m ( E S M )
r e s ol ut i on m e c ha ni s m 90 – 91 , 165 , 195
s i ngl e r e s ol ut i on m e c ha ni s m ( S R M ) 195
s i ngl e s upe r vi s or y m e c ha ni s m ( S S M ) 195
R om a ni a 41 , 108 , 113 , 124 , 126 , 147
R om e t r e a t y 8 , 97 , 110 , 193
R ös l e r , P hi l i pp 78
R ue f f , J a c que s 9
R um s f e l d, D ona l d 143
R us s i a , i nf l ue nc e on U kr a i ne 149 – 150
R ut t e , M a r k 77
S
S a m a r a s , A nt oni s 2 , 78 , 82 , 93 – 94
S a nt e r , J a c que s 97
S a r koz y , N i c ol a s

c r i s i s r e s pons e 40 – 41 , 44
e c onom i c gove r na nc e 49 – 50
E ur ope a n c ons t i t ut i on 28
L T R O s a nd t he S a r koz y t r a de 69
M e r ke l c ol l a bor a t i on 51 – 52 , 60 , 61 – 62 , 102 – 103
S c hä ubl e , W ol f ga ng 62 , 75 , 84 , 90 – 91 , 106 , 11 1 , 154
S c he nge n A gr e e m e nt 110 , 11 1 – 112
S c hm i dt , H e l m ut 11 , 100
S c hr öde r , G e r ha r d 18 , 101 , 127
S c hul z , M a r t i n 131
S c hum a n D a y 8
S c hum a n, R obe r t 7 – 8
S c ot l a nd 112 , 178
S D R ( s pe c i a l dr a w i ng r i ght s ) 63
S e c ur i t i e s M a r ke t P r ogr a m m e ( S M P ) 48 , 79
s e r vi c e s di r e c t i ve 34
S ha f i k, N e m a t 65
S i kor s ki , R a de k 109
S i m i t i s , C os t a s 18
S i m m s , B r e nda n 179
s i ngl e c ur r e nc y
be ne f i t s 152
c l ub w i t hi n a c l ub 112
dr i vi ng f or c e s 12 – 14
i m por t a nc e of 113
vi s i on f or 9
s e e al s o e ur o
S i ngl e E ur ope a n A c t 13 , 193
s i ngl e m a r ke t 4 , 137 – 138 , 174 – 175
S i nn, H a ns – W e r ne r 101
s i x- pa c k 25 , 50 , 195
S l ova ki a 112
a dopt i on of e ur o 41
i nf l ue nc e 108
S l ove ni a 88 – 89 , 112
i nf l ue nc e 108

S M P ( S e c ur i t i e s M a r ke t P r ogr a m m e ) 48 , 79
s na ke i n t he t unne l 10
S ol a na , J a vi e r 142
s ove r e i gn de bt 165 – 166 s e e al s o publ i c de bt
S pa i n 110
ba i l – out 70 – 73 , 89
ba nk r e c a pi t a l i s a t i on 84
bond yi e l ds 37 , 89
C D S pr e m i um s 72
c ur r e nt – a c c ount ba l a nc e 168
da nge r of c ol l a ps e 59
e xc e s s i ve de f i c i t pr oc e dur e 89
f i na nc e s pr e – c r i s i s 30
G D P gr ow t h 32
i nf l ue nc e 107
publ i c de bt 159
publ i c opi ni on of E U 123 , 124
s i ngl e c ur r e nc y vi e w s 17
une m pl oym e nt 159
s pe c i a l dr a w i ng r i ght s ( S D R ) 63
s t a bi l i t y a nd gr ow t h pa c t 18 , 24 , 29 , 50 – 51 , 127 , 194
S t a r k, J ür ge n 59 , 106
S t e i nbr üc k, P e e r 43
S t r a us s – K a hn, D om i ni que 24 , 44 , 57
s t r e s s t e s t s , ba nk 72 , 175
s ubs i di a r i t y 133 , 141
S w e de n 109 , 11 1 , 112
e ur o opt – out 18 , 115
U K s ym pa t hi e s 119
S yr i a 145
S yr i z a 124
T
T a r ge t I I 157
T ha t c he r , M a r ga r e t 27 , 110 , 116

t hi r d e ne r gy pa c ka ge 136
T i l f or d, S i m on 34
T i nde m a ns , L e o 11 1
t r a de pol i c y 138
T r a ns a t l a nt i c T r a de a nd I nve s t m e nt P a r t ne r s hi p ( T T I P ) 138 – 139
t r e a t y m a ki ng a nd c ha nge 26 – 27 , 173 – 174
T r e a t y of A m s t e r da m 11 1 – 112 , 193
T r e a t y of L i s bon 28 , 45 , 194
f or e i gn pol i c y 142
i ns t i t ut i ons 20 , 131
j us t i c e a nd hom e a f f a i r s ( J H A ) 139
s ubs i di a r i t y 133
vot i ng 20 , 114
T r e a t y of N i c e 194
T r e a t y of R om e 8 , 97 , 110 , 193
T r e a t y on E ur ope a n U ni on ( M a a s t r i c ht t r e a t y) 11 – 12 , 15 , 22 , 142 , 193
opt – out s a nd r e f e r e ndum s 16 , 110 – 11 1
T r e a t y on S t a bi l i t y , C o- or di na t i on a nd G ove r na nc e ( T S C G ) s e e f i s c a l
c om pa c t t r e a t y
T r e m ont i , G i ul i o 54 , 60
T r i c he t , J e a n- C l a ude 151 , 156
bond- buyi ng 47 – 48 , 52 – 53
c r i s i s – m a na ge m e nt pl a nni ng 2
e a r l y w a r ni ngs 39 – 40
E C B pr e s i de nt 23
I M F 44
I t a l y 59
T r ue F i nns 124
T ur ke y 132 , 147 , 148
T us k, D ona l d 109 , 114
t w o- pa c k 25 , 89 , 195
U
U K I nde pe nde nc e P a r t y ( U K I P ) 118 , 125 , 140
U kr a i ne 149 – 150 , 179 – 180

une m pl oym e nt 158 – 159 , 170
uni on m e t hod 19 , 22
U ni t e d K i ngdom
c ur r e nt – a c c ount ba l a nc e 168
e c onom i c s t r e ngt hs a nd w e a kne s s e s 14
E M S e xc ha nge – r a t e m e c ha ni s m 16
e ur o c r i s i s r e a c t i on 117 – 118
e ur o m e m be r s hi p 112
E ur ope a n budge t c ont r i but i on 27 – 28
E ur ope a n i nvol ve m e nt 8 , 10 , 12 , 115 – 119
f ut ur e s t a t us 174 – 175
i nf l ue nc e 100 – 101 , 106 , 109 , 142 – 143
i ni t i a l a ppl i c a t i on t o j oi n E E C 9
opt – out s 110 – 11 1 , 139
publ i c opi ni on of E U 123
s i ngl e c ur r e nc y vi e w s 17
U ni t e d L e f t pa r t y 124
U ni t e d S t a t e s
a ba ndonm e nt of gol d s t a nda r d 10
f e de r a l i s m m ode l 177
f or e i gn pol i c y 143
pe r f or m a nc e c om pa r e d w i t h e ur o z one 154 – 155
U r pi l a i ne n, J ut t a 77
V
V an G e nd e n L oos v N e de r l ands e A dm i ni s t r at i e de r B e l as t i nge n ( 1963) 21
V a n R om puy , H e r m a n 98
c r i s i s – m a na ge m e nt pl a nni ng 3
C ypr us 87
E ur ope a n C ounc i l pr e s i de nc y 20 , 28
I t a l y 63
r oa dm a p f or i nt e gr a t i on 74 – 75 , 84 , 173
s uppor t f or G r e e c e 43 – 45
V e ni z e l os , E va nge l os 57 , 62
V e r hof s t a dt , G uy 131

V é r on, N i c ol a s 35
V i l ni us s um m i t 149
von W e i z s ä c ke r , J a kob 166
W
W a i ge l , T he o 17 – 18
W a l l S t r e e t f l a s h c r a s h 47
W e be r , A xe l 49 , 56 , 106
W e i dm a nn, J e ns 40 , 80 , 82
W e i z s ä c ke r , J a kob von 166
W e r ne r r e por t ( 1971) 10
W i l s on, H a r ol d 116
W ol f s on P r i z e 1
W or l d B a nk 33
W or l d T r a de O r ga ni s a t i on 138 – 139
Y
Y a nukovyc h, V i kt or 149
Z
Z a pa t e r o, J os é L ui s R odr í gue z 59 , 62
Z ol l ve r e i n 9

P ubl i c A f f a i r s i s a publ i s hi ng hous e f ounde d i n 1997. I t i s a t r i but e t o t he
s t a nda r ds , va l ue s , a nd f l a i r of t hr e e pe r s ons w ho ha ve s e r ve d a s m e nt or s t o
c ount l e s s r e por t e r s , w r i t e r s , e di t or s , a nd book pe opl e of a l l ki nds ,
i nc l udi ng m e .

I . F . S T O N E , pr opr i e t or of I . F . St one ’ s W e e k l y , c om bi ne d a c om m i t m e nt t o
t he F i r s t A m e ndm e nt w i t h e nt r e pr e ne ur i a l z e a l a nd r e por t i ng s ki l l a nd
be c a m e one of t he gr e a t i nde pe nde nt j our na l i s t s i n A m e r i c a n hi s t or y . A t
t he a ge of e i ght y , I z z y publ i s he d T he T r i al of Soc r at e s , w hi c h w a s a
na t i ona l be s t s e l l e r . H e w r ot e t he book a f t e r he t a ught hi m s e l f a nc i e nt
G r e e k.

B E N J A M I N C . B R A D L E E w a s f or ne a r l y t hi r t y ye a r s t he c ha r i s m a t i c
e di t or i a l l e a de r of T he W as hi ngt on P os t . I t w a s B e n w ho ga ve t he P os t t he
r a nge a nd c our a ge t o pur s ue s uc h hi s t or i c i s s ue s a s W a t e r ga t e . H e
s uppor t e d hi s r e por t e r s w i t h a t e na c i t y t ha t m a de t he m f e a r l e s s a nd i t i s no
a c c i de nt t ha t s o m a ny be c a m e a ut hor s of i nf l ue nt i a l , be s t – s e l l i ng books .

R O B E R T L . B E R N S T E I N , t he c hi e f e xe c ut i ve of R a ndom H ous e f or m or e
t ha n a qua r t e r c e nt ur y , gui de d one of t he na t i on’ s pr e m i e r publ i s hi ng
hous e s . B ob w a s pe r s ona l l y r e s pons i bl e f or m a ny books of pol i t i c a l
di s s e nt a nd a r gum e nt t ha t c ha l l e nge d t yr a nny a r ound t he gl obe . H e i s a l s o
t he f ounde r a nd l ongt i m e c ha i r of H um a n R i ght s W a t c h, one of t he m os t
r e s pe c t e d hum a n r i ght s or ga ni z a t i ons i n t he w or l d.
F or f i f t y ye a r s , t he ba nne r of P ubl i c A f f a i r s P r e s s w a s c a r r i e d by i t s ow ne r
M or r i s B . S c hna ppe r , w ho publ i s he d G a ndhi , N a s s e r , T oynbe e , T r um a n,
a nd a bout 1,500 ot he r a ut hor s . I n 1983, S c hna ppe r w a s de s c r i be d by T he

W as hi ngt on P os t a s “ a r e doubt a bl e ga df l y .” H i s l e ga c y w i l l e ndur e i n t he
books t o c om e .
P e t e r O s nos , F ounde r and E di t or – at – L ar ge