It Could Have Been Different

Barry Eichengreen was an early skeptic about the prospects for monetary union in Europe.

Nowadays the eminent economic historian acknowledges the single currency is here to stay. But he says much more should done to prevent the return of austerity that was the price millions of Europeans paid for saving the single currency this decade. A failure to make further reforms, warns Eichengreen, who teaches at the University of California, Berkeley, could be cataclysmic for Europe.

“There is a link between high unemployment and social distress on the one hand and voting for extremist parties by and large on the right because that then is a way to effectively shift some of the blame for what people are experiencing toward foreigners,” he says. "It’s much too easy to look at the incidence of unemployment in Germany in the 1930s and draw a link with the rise of voting for National Socialism but there is something of a link there.”

Eichengreen spoke to EU Scream in Brussels where he was giving the academic lecture at an annual meeting of the Centre for European Policy Studies and presenting his latest book, The Populist Temptation, which he wrote with his family’s suffering at the hands of the Nazis in mind. “The fact that we see resurgent nationalism, xenophobia, antisemitism all alive in Europe today certainly resonates with history, and it resonates with my personal history,” he says.

Eichengreen also identifies the perception that Brussels policymakers are overreaching as part of the narrative nationalist populists use to discredit the European Union. Brussels, he says, would be wise to pull back and return more authority to member states in the area of fiscal oversight. That would mean effectively ditching rules that oblige Brussels to punish countries violating debt and deficit limits.

Eichengreen acknowledges such a pull back would rely on Germany creating a shared system to shore up European banks that run into trouble. Yet that could help reduce tensions between northern Europeans who see southern Europeans as profligate. “If you break the so-called diabolic loop between budget problems and banking problems, at that point I think it becomes safe to return control of fiscal policies to the member states,” says Eichengreen.

The International Monetary Fund also comes in for criticism as supine by failing to insist on easier loan conditions for Greece in 2010.

“I think what I find most extraordinary is the fact that the I.M.F. laid down and accepted the European institutions unwillingness to contemplate debt restructuring in Greece,” says Eichengreen. “That was a point I think where — had Strauss-Kahn not been running for the French presidency — the Fund might have behaved differently and that could have changed the course of history,” says Eichengreen, referring to the then-managing director of the International Monetary Fund, Dominique Strauss-Kahn.

Strauss-Kahn was running the Fund when it accepted a role in the bailout. By involving the Fund in the Greek debt drama, Strauss-Kahn raised his profile for his presidential bid. But that locked the Fund into an arrangement with Germany, which pushed for tough loan terms on Greece.

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