Jean-Claude Juncker’s boast about the euro is an insulting fantasy

CapX, January 4, 2019

History may or may not repeat itself, but hubris certainly does. In April 2008, as the euro approached its tenth birthday, Joaquín Almunia, the EU’s then Commissioner for Economic and Monetary Affairs, recalled how its construction had been accompanied by “dissenting voices”. “One economist” had jeered that it was “at best, an act of uncertain merit”. Another had denounced it as a “great mistake”. Fools! Almunia bragged that “the euro [had] proved an economic success”.  Within 18 months Greece was in crisis.

Earlier this week Jean-Claude Juncker marked the euro’s 20th anniversary of with words seemingly so far removed from reality that not even sciatica could explain them away: “The euro has become a symbol of unity, sovereignty and stability. It has delivered prosperity and protection to our citizens…”

Goebbels once wrote that “the English follow the principle that when one lies, one should lie big, and stick to it. They keep up their lies, even at the risk of looking ridiculous”. However, he would not have expected the English to mock those who they were trying to convince.

Juncker, no Englishman, but known to some as “the master of lies”, has rarely shown much concern about appearing ridiculous. Nevertheless, boasting that that the euro has delivered prosperity insults almost every member state other than Germany, particularly those hit hardest by the bursting of bubbles wholly or partly inflated by the single currency. Most may have crawled out of the A&E (or in Ireland’s case done rather more than that), but memories of what they went through are fresh. And in some instances, they aren’t even memories. Youth unemployment in Greece has only recently fallen below 40 per cent. GDP per capita in Italy (where the euro’s corrosive effect is real, but more difficult to assess) stands roughly where it did in 1999.

On the other hand, Juncker’s claim that a currency which has brought chaos and division in its wake is a symbol of “unity” and “stability” may seem equally absurd, but seen from Brussels, it makes good sense. To appreciate why, note the reference to “sovereignty” as another of the qualities symbolised by the euro. A country that relinquishes its own currency gives up some of its sovereignty, but Juncker was focused on where that sovereignty had been transferred. And that was to “Europe”. Having its own currency represented a major advance in the EU’s step-by-step assumption of sovereignty, and with it, the attributes of a state.

Now adopt that same Brussels perspective to understand what Juncker meant by unity. Despite sharp disagreements, those running the Eurozone stuck together through the crisis, trashing treaty obligations, promises to voters, a referendum result, the integrity of the European Central Bank, economic logic and basic democratic norms to keep the currency union intact. They succeeded in a display of unity that also delivered Juncker’s notion of stability — a Eurozone that weathered the storm — as well as a strong indication that it will continue to overcome the challenges that come its way.

Part of the reason for that, is that once in the euro, there is no easy exit. “Ever closer union” are perhaps the three most important words in the EU’s definition of itself: They imply that there is no reverse gear. Nowhere is this more the case than, as its creators intended, with the single currency, described in 2012 by one top German civil servant as “a machine from hell that we cannot turn off” — words to remember amid current talk of widespread support for the euro.

But back to hubris. Like so much central planning, the euro was born of arrogance, over-confidence, conceit and ideological obsession. Cramming a large number of diverse economies into a necessarily Procrustean currency union made little economic sense—the savings flowing from the removal of foreign exchange risk were somewhere between minimal and illusory. It was also an invitation to disaster, made riskier still by the absence of any degree of fiscal union, something which might have provided a safety net, but would not have been politically acceptable in many of the countries signing up for the new currency.

One example of hubris overlapped with another. Some of those in charge of putting the euro together were aware of its innate flaws but expected that they would eventually lead to—as the phrase in Brussels goes— a “beneficial crisis”. This would be the catalyst for forcing through the fiscal union that had always been the logical counterpoint of monetary union and would also constitute a giant leap forward towards ever closer union. The hubris lay in believing that such a crisis would be manageable in the manner that Brussels hoped.

It wasn’t. Even allowing for its starting point, Juncker’s perception of unity is based on turning a blind eye to some highly inconvenient truths. Made even more destructive by its intertwining with the financial crisis, the storm that tore into the Eurozone essentially divided the currency union’s member states into two antagonistic camps, creditor nations in the north and debtor nations in the south.

The north’s distrust of the south, and the south’s resentment of the north, along with economic distress and the realisation that Brussels and its allies bore much of the blame for this mess (but had no interest in changing direction) also boosted political parties once confined to the fringe or triggered the formation of new parties that would once have found a home there. Those forces were given additional impetus by an unrelated issue— mounting unease over immigration and its longer-term implications. What’s more, many continental eurosceptics have been transformed from naysayers opposed to further integration into a force that actively wants to reverse the direction of ‘ever closer union’. Populist governments (of very different hues) have come to power in Greece and Italy.

Germany and other ‘northern’ states are now even more firmly set against fiscal union, rightly regarded as a device to milk their taxpayers in perpetuity. In the Eurozone’s south, meanwhile, there is increased resistance to Germany’s insistence on enforcing its sometimes counter-productive brand of fiscal discipline on everyone else. It’s significant that, with Emmanuel Macron’s own plans for fiscal union floating face-down in the Spree and gilets jaunes roaming France’s streets, his government will now be breaching (just a one-off, of course) the EU’s budgetary rules.

All that said, betting against the survival of the euro is unwise. The political will to keep this vampire currency going should, as the last ten years have shown, not be underestimated and populist parties are just as conscious as their more orthodox rivals of the general public’s fear of ‘something worse’.

But European growth prospects are deteriorating despite years of the ECB doing “what it takes”. The economies (and balance sheets) of many of the Eurozone’s weaker member-states continue to suffer from the after-effects of the last crisis and remain confined to the straitjacket of a one-size-fits-all currency:  They will not be well placed to cope with a fresh slowdown. It’s hard to avoid the conclusion that another Eurozone drama may well be approaching, with political consequences that are likely to be much trickier than last time around.

One way to head off some of the worse of what might lie ahead would be by splitting the single currency into ‘northern’ and ‘southern’ euros which would better reflect the economic realities of the domestic economies they serve. This would be far from straightforward, but it beats sticking with a status quo that offers much of the Eurozone little more than stagnation at best, and catastrophe at worst.

But such a split runs against the idea of the irreversibility of ever closer union. It’s never going to happen.

Don’t believe the EU – Greece’s crisis is nowhere near over

CapX, August 17, 2018

With Nemesis dodged, however ruinously, it has not taken too long for Hubris to reemerge from under the rubble.

“The Greek crisis ends here tonight,” declared the EU commissioner for Economic and Financial Affairs within minutes of the conclusion of the June meeting at which it was agreed that Greece would receive the final slice (€15 billion) of its third Eurozone bailout this August.

Even though Greece’s graduation from rehab had been sweetened by its Eurozone creditors extending the repayment date of almost €100 billion of debt (about a third of the total) by ten years, this claim of victory was both tasteless (youth unemployment currently stands at nearly 40 per cent) and premature. Greece will be left with a cash cushion of €24 billion, which should enable it to avoid having to approach the financial markets for around two years — a handy breathing space, to be sure, but one that is more likely to be a respite than the preamble to a cure.

The country’s GDP expanded by 1.35 per cent in 2017, after almost a decade of annual declines interrupted only by the annus mirabilis of 2014, the one year when it eked out a positive return, a miserly 0.74 per cent. The IMF reckons that the pace will pick up to 2 per cent in 2018 and 2.4 per cent in 2019, which is at least something, if less than hoped earlier.

Perhaps that might happen — if the global economy keeps ticking over (and the neighbourhood remains calm: let’s not talk about Turkey and Italy) — but it’s impossible to miss the subtext lurking within the IMF’s recent report on Greece. Has a slump as deep as America’s Great Depression, but more prolonged, left behind enough of a country to make its own way? And will, as the IMF clearly worries, the continued policing of Greece’s finances by its reluctant rescuers be so severe that it shrinks the scale of a desperately needed recovery?

Formal exit from the bailout regime will mean an end to the harshest of the austerity measures that went with it, but Athens will still be required to maintain an annual “primary” (i.e. before debt servicing) budgetary surplus of 3.5 per cent until 2022. The straitjacket will then be loosened — somewhat. The government will be expected to achieve an average annual primary surplus of 2.2 per cent until, well, 2060.

Adding a culturally appropriate touch of Sisyphus to this already implausible undertaking (the IMF diplomatically talks of “very optimistic assumptions”), any new funding from the markets will be priced on far less generous terms than Greece’s rescuers have been charging.

And there’s no reason to be sanguine about that existing debt. It may be cheap and the timetable for its repayment leisurely, but its sheer size (some 180 per cent of GDP) means trouble ahead. After all, this is not a drachma-denominated liability that Greece once might have printed away. And it wouldn’t be a drachma-denominated liability even if Greece readopted the currency it should never have abandoned. A reborn drachma would plummet so far that the dream of repayment would quickly be replaced with the reality of default.

Brussels’ convenient conceit is that the EU’s new and improved Greece will grow out from under this burden, an unlikely prospect made more unlikely still by overly onerous budgetary constraints and the structural problems that should have made the country ineligible for the euro in the first place.

To start with, there is the matter of ensuring the economy can keep up with the rest of the Eurozone, not easy given the country’s persistently low productivity. Back in the days of the drachma, Greece could at least devalue its way into some approximation of competitiveness. With that option off the table, the conventional alternative, a domestic squeeze — an “internal devaluation”, to use the jargon — has been tried since the early stages of Greece’s long Calvary, and it is still being tried. But whatever its merits as a device to eliminate some of the worst aspects of the Augean state, there is scant evidence that it has done very much to sharpen the country’s competitiveness.

Indeed, in some respects it may have made things worse. Destruction can be creative, but sometimes it is just destructive. GDP stands at 2003 levels and at less than 60 per cent of its 2008 peak. Disposable income has fallen by about a third since 2010 and the private sector has been devastated. The banking sector is under-capitalised (credit is still contracting).

In short, so much has been smashed up that it is difficult to see where the type of turnaround Greece needs can come from. Three hundred thousand Greeks, including many of the nation’s best and the brightest, have emigrated in the last eight years, a move made easier by their right to settle anywhere within the EU. How many will come home?

A similar question can be asked about capital, which also moves freely throughout the EU and, as between the different countries of the Eurozone, with (the danger of eurogeddon apart) no currency risk: A French euro is a Finnish euro is a Greek euro. If a euro invested in Greece cannot offer the returns available from a euro invested elsewhere in the Eurozone, the country will struggle to attract investment, whether domestically or from abroad.

Rather than promote the economic convergence of its constituent parts, a currency union could well have the opposite effect. Capital will tend to flow to its winners and away from its laggards, a process that could doom Greece to ever more peripheral status. This slide will be accelerated by the unwillingness of the Eurozone’s member-states to agree to supplement their monetary union with a fiscal union that would, as in the US, establish the automatic transfer of resources from richer to poorer states that operates as a brake on a currency union’s natural centripetal pull.    

The task of modernising the Greek economy is, to put it mildly, incomplete, and there must be some doubt as to how much further its government is prepared to go down that route. The authors of the IMF report refer politely to “reform fatigue”. “Political pressures,” it warns, “to roll back reforms may intensify ahead of the 2019 elections”. Indeed they may, not only because of the agony associated with these reforms (made even more painful by outcomes with a tendency to disappoint), but also because of the largely accurate perception that they have been imposed from outside.

A good number of the real culprits — most notably those who took Greece into a currency union for which it was not ready and then squandered the opportunity it might have represented— are home-grown, but that’s not how it appears to many voters. Under the circumstances, it will not be surprising if some politicians are tempted to suggest to them that Sisyphus should shrug.

But even if Greeks do vote to stay the course — and the best guess is that they will, if only, in many cases, because they fear the alternatives —  and even if Italy’s new government does not trigger a broader Eurozone fracas, economics will eventually reignite the Greek crisis and, probably, sooner rather than later.

One of the rare, if partial, concessions to reality in the arrangements negotiated in June was that the Eurozone’s leadership will take another look at Greece’s situation in 2032 (2032!) to see if further debt relief is required. Well, it will be — and quite some time before then, because, in the end, nothing has really changed. Greece will continue to pay a terrible price for membership in a currency union for which it was, is and will be completely unsuited, but is understandably terrified to leave.

Its creditors, meanwhile, particularly in the Eurozone’s richer north, are terrified about the damage a Grexit could do to a Eurozone built on unstable foundations that they don’t want to complete, demolish or remodel. And so, after a re-run of a drama that will be stale before it has begun, there will be a fourth Greek bailout – and that won’t change much either.

How Not to Fix the Euro: More Leftism

Joseph E. Stiglitz - The Euro: How A Common Currency Threatens The Future of Europe

National Review, October 10, 2016

Imagining that a large number of very different economies could be squeezed into a single poorly constructed currency was one fatal conceit. Imagining that the story of what happened next could be squeezed into one rigid “narrative” was another — but that’s what economist Joseph Stiglitz has done in The Euro, a badly flawed book about a disastrous idea.

Stiglitz, a Nobel laureate and a Columbia professor, has been crusading for years now against the wickedness of “neoliberalism,” a term that, like “late capitalism,” says more about the person using it than about what it purports to describe. Check out the titles of some of his more recent books: “The Great Divide: Unequal Societies and What We Can Do about Them,” “The Price of Inequality,” “Freefall: America, Free Markets, and the Sinking of the World Economy.” The Euro is the latest installment in a long leftist tirade.

Stiglitz has valuable points to make on the EU’s dangerous monetary experiment, but it’s easy to lose sight of them amid all the pages devoted to his insistence that the devastation caused by the single currency is another example of the havoc that “market fundamentalism” has wrought.

Yet the euro was, at its core, an exercise in central planning. Stiglitz concedes that it was a “political project” to accelerate the process of European integration. But more than that, it was to be a challenge to the supremacy of the dollar and a permanent brake on the unruliness of foreign-exchange markets, ambitions far removed from market fundamentalism. Indeed, one of the earlier critics of the proposed new currency was Milton Friedman, not that Stiglitz finds the room — or the grace — to mention it.

Stiglitz questions the economic rationale behind the euro (arguing, intriguingly, that, contrary to the claims of its advocates, it was always likely to operate against convergence within the bloc) and the way that it was put together: The structures needed to make it work properly weren’t there. Yet his list of those responsible for the inevitable crisis is tellingly incomplete. To be sure, he acknowledges the important (and often overlooked) fact that individual governments could — even within the constraints of the euro zone — have done more to head off disaster than conventional wisdom now suggests, but, for the most part, he blames the Left’s preferred bogeymen, greedy bubble-blowing bankers and their accomplice, light-touch regulation.

But while there were undoubtedly areas in which regulation was too lax, the greater problem was that regulators were nudging financiers in wrong directions, whether it was toward real-estate-linked lending or into the belief that Greek sovereign risk was not that much greater than German. In the early years of the euro, Greece had to pay (on average) less than 0.3 percent more to borrow than Germany. That was nuts, but those steering the euro zone had persuaded themselves that the economies of the countries now locked into the currency union had truly converged. They hadn’t. And, crucially, the warning signals that would have been sent by the currency markets of old — a drachma crash, say — had been silenced. Ideology trumped reality, politics trumped markets, and the result was catastrophe. There’s a lesson in that, but Stiglitz doesn’t appear to see it.

Stiglitz is on safer ground criticizing the steps, from bullying the Irish government to assume private bank debt to the indiscriminate emphasis on “austerity,” taken by the euro zone’s leadership after the crisis erupted. The former is very hard to defend, and the latter was, in some cases at least, overdone, poorly timed, or both: There’s a limit to the extent to which a country can be expected to deflate its way to recovery. But to attribute — as Stiglitz does — the tough love shown by the “Troika” (the European Central Bank or ECB, the European Commission, and the International Monetary Fund) responsible for the euro zone’s bailouts to market fundamentalism is, to put it at its kindest, a misreading. What drove it was the complex internal politics of the currency union.

Stiglitz rightly highlights the difficulty of reconciling the management of the single currency and basic democratic principle. As he notes, voters in the euro zone’s laggards were offered no serious alternative to the harsh and sometimes questionable treatment prescribed for their countries. Beyond that essential but unremarkable insight, he touches on a broader, somewhat neglected issue: what it means when a democracy transfers the oversight of key areas of the economy from the legislature to technocrats and, specifically, to “independent” central banks such as the ECB, a practice Stiglitz attributes to the then (supposedly) prevailing “neoliberal ascendancy.”

That’s a debatable proposition to start with and it has next to nothing to do with the independence of the ECB, which echoes (as Stiglitz recognizes) the traditions of the Bundesbank (Buba), Germany’s legendary central bank. Far from being the product of late-20th-century neoliberalism, Buba’s independence — and its inflation-fighting mandate — date back to its origins in a ruined country that believed it knew where debauching a currency could lead.

Without Germany, there would have been no euro. But, proud of their Deutschmark, German voters didn’t want to switch to a new currency. Sadly, they were never given the chance to reject it, but assurances from their government that the ECB would, for all practical purposes, be a Buba 2.0 were part of a package of promises (no bailouts was another) designed to soothe their unease. Stiglitz discusses the fact that Germany shaped the ECB but fails to give enough weight to the democratic concerns that help explain why.

In any event, those promises were broken, and not just by a series of bailouts. Whether by effectively permitting local central banks to “print” new euros, or by allowing unpaid balances to mount up in its clearing system, or, belatedly (Stiglitz would argue), by a series of increasingly elaborate market operations culminating in the European version of “quantitative easing,” the ECB has turned out to be far less stingy a central bank than German voters had been led to believe it would be.

Stiglitz does not seem too bothered by this: Some democratic failures are evidently more equal than others. He is (legitimately) angry about the way that the Troika forced out the socialist Greek premier George Papandreou (his “long-term friend”), but he has nothing to say about the not-dissimilar putsch that replaced a less ideologically sympathetic figure, Italian prime minister Silvio Berlusconi, with an unelected, obedient proconsul.

Then again, this is the Stiglitz who claims that the objectives of European integration included “strengthening democracy” — a revealing interpretation of a project born of the notion that Europe’s voters could not be trusted to keep the peace. The idea behind what became the EU was that power should be transferred away from democratic nation-states to a supranational authority staffed by largely unaccountable technocrats. And over the decades, it was, often by the sleight of hand made necessary by European electorates’ stubborn suspicion of Brussels’ relentless drive toward ever closer union.

But a new currency was not something that could be introduced on the sly. People would notice. To a greater or lesser degree, the inhabitants of the future euro zone would have to consent to such a change, and to a greater or lesser degree they did. But they were not prepared to surrender enough sovereignty to give the euro a better chance of success. As much as Stiglitz might wish otherwise, that hasn’t changed. If there is to be any realistic prospect of keeping the current euro zone intact while restoring prosperity to its weaker brethren, it will, one way or another, involve a pooling of resources, but the richer countries won’t agree to that on terms that the poorer could accept. This impasse owes nothing to market fundamentalism and a great deal to the absence of a shared identity: Germans are Germans, Greeks are Greeks; neither are Eurozonian. They lack the needed sense of mutual obligation.

Stiglitz maintains that if the euro zone’s members won’t agree to a more comprehensive monetary union, big trouble lies ahead, threatening not only the euro but, maybe, the broader European project. I’m not convinced: “Muddling through” with what Stiglitz labels a blend of “temporary palliatives” as well as some “justly celebrated” deeper reforms has kept the currency going so far, albeit at a terrible cost. It could continue to do so for quite a while yet. And, despite the best efforts of the rebellious Brits, the EU seems set to endure too.

It’s worth adding that Stiglitz’s definition of that more comprehensive monetary union begins, understandably enough, with a credible “banking union,” debt mutualization, and the like, but then spills over into a vision of a command-and-control euro zone that — if that is what is really required to make the currency union work well — is another good argument for putting a stake through it once and for all.

A different way to go could, reckons Stiglitz, be the creation of a system under which euro-zone countries (or groups of countries) adopt “flexible euros” that trade against each other within a (much) more tightly managed version of Europe’s earlier exchange-rate regimes. He also puts forward yet another solution, some form of “amicable divorce”: Either Germany (alone or in conjunction with other northern European countries) should quit the euro zone, or the currency should be divided into new euros — northern and southern, a division that has, in my view, long been the right way to go. What unites these alternatives is the welcome recognition that one size does not fit all: A currency must reflect the realities of its home economy. Tragically, there’s no sign that the central planners in Paris, Brussels, Frankfurt, Paris, and Berlin agree. After all, they tell us, the euro-zone crisis is over.

We’ll see

A Vulnerable Equilibrium

Jens Nordvig: The Fall of The Euro

National Review Online, April 29, 2014

He ate poisoned cakes and he drank poisoned wine, and he was shot and bludgeoned just to make sure, but still Rasputin lived on. And that gives me just enough of an excuse to use the mad, almost indestructible monk to begin an article about a mad, possibly indestructible currency. The euro has crushed economies, wrecked lives, toppled governments, broken its own rule book, made a mockery of democracy, defied market economics, and yet it endures, kept alive by the political will of the EU’s elite, fear of the alternative, and the magic of a few words from Mario Draghi, the president of the European Central Bank (ECB) back in July 2012.

Speaking to an investment conference, Draghi said that, “within our mandate” (a salute to watchful Germans), the ECB was “ready to do whatever it takes to preserve the euro.” “Believe me,” he added, “it will be enough.” Those few words, and their implication of dramatic market intervention, did the trick. Financial markets calmed down, and there are now even faint hints of economic recovery in the worst corners of the euro zone’s ER. And all this has happened without the ECB’s actually doing anything. Simply sending a signal sufficed.

The crisis has been declared over by the same Brussels clown posse that always declares the crisis over. They may be right, they may be wrong, but a calm of sorts has descended on the euro zone — not peace exactly, but quiet, punctuated occasionally by tremors that may be aftershocks, but could be omens of fresh chaos ahead.

That makes this a good time to take a look at The Fall of the Euro, a guide to the EU’s vampire currency by Jens Nordvig, global head of currency strategy for the Japanese investment bank Nomura Securities. If you are looking for a quick, clear, accessible account, free from financial mumbo-jumbo, that explains how the euro came to be, why trouble was always headed its way, what was done when the storm broke, and what might happen next, this book (which was published last autumn) is an excellent place to start.

It is written from the point of view of a market practitioner. Nordvig is not too fussed about the deeper European debate. He mainly wants to know what works. Here and there he will nod politely to democratic niceties, but this is a book where worries over lost sovereignty are dismissed as “sentimental.” Overall, Nordvig is a supporter of closer European integration (“a noble ideal,” he maintains — it isn’t, but that’s another story), but one with considerably less time for illusions than most in his camp.

And the euro, he argues, was built — and run — on illusions, the illusion that Germany was Italy, Italy was Portugal, and Portugal was Finland, the illusion that one size would fit all. Its creation was a “reckless gamble.” Politics prevailed over economics. No one made any preparations for the rainy day that could never come. The foundations for catastrophe were laid, and then built on by regulators, policymakers, and financial-market players only too happy to believe that the impossible was possible. Imbalance was piled on imbalance, and a shared currency masked the nightmare developing underneath. Employed by Goldman Sachs at the time, Nordvig saw how markets viewed the euro zone as an indivisible whole. But Greece was still Greece. And Germany was still Germany.

“Policy makers,” writes Nordvig, “can attempt to circumvent the basic laws of economics, but over time, the core economic truths take their revenge.” Unsustainable boom was followed by what has seemed, until recently, like permanent bust.

Nordvig does a fine job of explaining how the euro zone has been kept intact since the storm first broke, but he focuses more on the how than on the implications. Thus he relates how some of what has been done appears to “circumvent” a clear legal prohibition on European Central Bank financing of public-sector deficits, but seems to see that as more of a curiosity than cause for concern. But concern is called for: The EU’s combination of lawlessness at the top (remember how the Lisbon Treaty was used to “circumvent” those French and Dutch referenda) and tight control over everyone else has been a hallmark of tyranny through the ages.

Then again, financial types generally focus, understandably enough, on the financial rather than the political. But when the two look to be at risk of colliding, market attention shifts. Nordvig suspects that the euro zone may be getting closer to one of those moments.

He sees the euro zone as having emerged from its travails into what is now a state of “vulnerable equilibrium.” But to work properly, it needs substantially deeper fiscal and budgetary integration — something resembling the set-up that underpins monetary union in the U.S. He’s right about that, and that he is goes a long way toward explaining why euroskeptics are so opposed to the single currency. A realist, Nordvig concedes that the political support for such a step is simply not there, and he’s right about that too. New Yorkers might grumble about the way that, courtesy of the federal government, they effectively send cash to Mississippi, but they accept that their two states are in the same American boat. Germans look across at the Greeks (and other mendicants) and realize that they have been conned into bailing out a bunch of foreigners. That’s why, when Germany accepted the need for some sort of fiscal union to keep the euro zone in one piece, it insisted (as Nordvig explains) on an arrangement that falls far short of how such a union is usually understood. The Fiscal Compact that ensued is intended to minimize deficit spending in euro-zone member states rather than give Brussels additional spending power, spending power that could have been used to help out the battered periphery. It is no “transfer union.”

All that is left for the euro zone’s weaker performers is yet more austerity (sensibly enough, Nordvig sees the current currency regime as akin to a gold standard, and not in a good way), adding further bite to the deflationary crunch which these countries face. And it’s a crunch made worse by the perception, both fair and unfair, that it is being imposed on them from “abroad.” Greece is not Germany. And nor is France.

With bailouts resented in the euro zone’s more prosperous north, and austerity loathed elsewhere, it’s surprising how passive voters have been. There are plenty of explanations for this, but Nordvig is right to stress fear of the turbulence that abandoning the euro might unleash (a fear reinforced by establishment propaganda and the failure of many of the euro’s critics to articulate a credible alternative). A residual attachment to that “noble idea” of closer European union has also played a part as has, Nordvig notes, the determination of the dominant parties of center right and center left to hang onto the single currency. That’s something that has left anti-euro, but otherwise mainstream, voters struggling to find an outlet for their discontent.

That said, the prolonged economic grind is increasingly forcing voters in the direction of less respectable parties (such as France’s Front National) that believe that the euro zone and EU need much more than a mild course correction (the FN would pull France out of the euro). If these parties gain significant ground in May’s elections to the EU parliament (the betting is that they will), the danger (or opportunity) is not that they will overthrow the prevailing consensus in the EU parliament (they have neither the numbers nor the cohesion to do that), but that their success will shove their mainstream opponents in a more euroskeptic direction back home. Credibly enough, Nordvig identifies the possibility of a revolt within the political center (which could take very different forms: The Finns, say, may decline to support another bailout, while the Greeks might eventually turn away from austerity) as another potential block on the road to the closer integration that the single currency needs.

Even if the euro zone’s leadership does manage to fumble its way to agreeing on how closer integration could be secured — a deal that would inevitably involve massive transfers of sovereignty to Brussels — it will not be easy to push such a package through without the approval of a referendum or two. On past form, and in the electorate’s present mood, that will not be easy.

But, warns Nordvig, “if further integration is not feasible, some form of breakup is inevitable.” Nordvig may be sympathetic to the European project, but he is too much of a realist to pay too much attention to the Brussels myth that there is no alternative to preserving the euro “as is.” Specifically, he rejects the argument that, just because a “full-blown” breakup would be cataclysmic (as Nordvig convincingly shows, it could well be), all forms of breakup must be too. That’s a claim he heretically and correctly regards as little more than “a convenient tool to bind the euro zone together” and one, moreover, that has been used to stifle any proper analysis of what the costs and benefits of, say, a particular country’s quitting the euro might be. Such a departure, he believes, could be engineered “without intolerable pain.”

In understanding what Nordvig means by this, pay attention to his observation that “the cost of exit may be more concentrated around the transition phase, while the cost of sticking with the euro accumulates gradually over time.” Jumping out of a burning building is never easy, but it often beats the alternative.

Nordvig deftly summarizes what the costs and benefits of that jump might be, concluding that quitting the euro would be very tough for Ireland, Greece, Portugal, and Spain, easier than perhaps expected for France and Italy, and easiest (although far from problem-free) for Germany (I’d agree). That’s a position that logically takes him not too far (although he doesn’t quite arrive there) from support for a division of the single currency into northern and southern euros, something that has, in my view, long been the way to go. According to Nordvig, however, the most likely quitter is a country reduced to a state of such excruciating agony (not only in that burning building, but on fire) that exiting the euro finally comes onto the agenda. That is highly unlikely to be Germany, the nation most able to cope, inside the euro and out.

So what happens next? Suitably cautious in the face of such an uncertain environment, Nordvig lays out a number of different scenarios. While accepting, as he should, that political turmoil could upend everything, Nordvig appears, on balance, to conclude that the German austerity model will prevail, that a transfer union will be avoided, and that the euro zone’s laggards will trudge their way to an excruciatingly slow recovery. My own suspicion is that this assumes too much patience on the part of the periphery. Pushed both by common sense and fear of an increasingly unruly electorate, its governments will start a slow-motion revolt against what remains of the hard-money ECB that the Germans were once promised. Still in thrall to the cult of “ever closer union,” and terrified of the alternatives, Germany’s leadership will acquiesce. In fact there are clear signs that this process may be well underway.

This will lead to another of the scenarios sketched out by Nordvig. Loose money will try to fill some of the gap left by the transfer union that never was, and will do so just well enough to enable the euro to survive, but as a currency that is more lira than deutsche mark. That will be yet another betrayal of taxpayers in Europe’s north, while leaving the continent’s south still trapped in a system that does not fit.

And for what?