EUROPEAN UNION WORLD

The European Financial Crisis

3. How it all works

THE EUROPEAN PROJECT (and thus the euro) suffers both from a lack of clarity over its precise nature and end-point and from the dull complexity of its institutional structure. Like a pantomime horse, it has long had a dual character, reflecting an initial compromise between those countries wanting a United States of Europe and those preferring a club of nation-states. Thus it has federalist elements such as the European Commission, a (now directly elected) European Parliament, a European Court of Justice and a European Central Bank. But it also has strong inter-governmental bodies: the Council of Ministers, representing national governments, and the European Council of heads of state and government. An important force throughout the euro crisis has been the tension between those preferring federal answers (often called the “community” method) and those favouring intergovernmental solutions (sometimes referred to as the “union” method).1

At the heart of both the EU and the euro stands the European Commission, to which each of the currently 28 national governments appoints one commissioner for a five-year term (the next Commission takes office at the end of 2014). Commissioners, based in Brussels, are legally required to be wholly independent, although in practice they usually do what they can to advance national interests. The “college” of 28 commissioners sits above a 20,000-strong bureaucracy that functions as the European Union’s executive branch. The Commission is the guardian of the treaties, has the nearexclusive right of legislative initiative, administers competition and state-aid law and conducts certain third-party negotiations, for instance on trade, on behalf of the EU as a whole.

The Council of Ministers is the senior legislative body. It consists of ministers from national governments, meeting in different formations (finance or EcoFin, agriculture and fisheries, environment, and so on). In many areas the Council takes decisions by qualified majority, a system of weighted votes that, under the 2009 Lisbon treaty, is due to change in late 2014 into a new arrangement of a “double majority” that takes greater account of population size. Council meetings are prepared by officials in the Committee of Permanent Representatives in Brussels (COREPER); EcoFin meetings are often prepared by the official-level Economic and Financial Committee; and there is also a euro working group. The Council presidency rotates every six months from one country to another, though this system has been modified, under Lisbon, by the arrival of a permanent president of the European Council and a high representative for foreign policy, who chairs Council meetings of foreign ministers as well as being a vice-president of the Commission.

The European Council is, in effect, the most senior formation of the Council of Ministers. It did not exist at the start of the European project, but over time the practice of calling occasional summit meetings of heads of state and government to give general direction and to resolve the most contentious disputes became habitual. Under Lisbon, the European Council has a full-time president, currently Belgium’s Herman Van Rompuy, who serves for a maximum of five years (his term expires at the end of 2014). Van Rompuy has set the pattern of holding European Council meetings every two months or so. These summits have often received much publicity, especially during the euro crisis when they have often drifted into weekends and the early hours of the morning. Over time, the European Council has become the strategic engine of the European Union, largely displacing the Commission, a switch that has become even clearer as a result of the euro crisis.

The Commission makes most of its legislative proposals jointly to the Council and the European Parliament, the second legislative body in the EU. The Parliament, which has been directly elected since 1979, now has 751 members. At French insistence, it is formally based in Strasbourg for most of its monthly plenary sessions, although its committees and most of its members (MEPs) are generally based in Brussels. Elections are held every five years: the 2014 ones are scheduled to take place between May 22nd and May 25th. Successive treaties have given the Parliament ever-greater powers, and it is now more or less co-equal with the Council of Ministers in legislation. The European Parliament must approve the annual budget as well as the multi-annual financial framework. It can reject the budget (it did so in December 1979). Unlike the Council, it can also sack the Commission (it used this power to force the Santer Commission’s resignation in 1999). And, again under Lisbon, the Parliament now has the power to “elect” the Commission president, after he or she is nominated by the European Council, a provision that creates an obvious risk of a huge institutional bust-up.

The most important remaining institution is the European Court of Justice, based in Luxembourg, which acts as the European Union’s supreme court and adjudicates on disputes both among the institutions and between countries in areas of EU competence (so it has no role in the criminal law, for example). The court has one judge per country, though there is also a Court of First Instance to reduce its workload. Cases are usually decided by simple majority. The Court of Justice (not to be confused with the Strasbourg-based European Court of Human Rights, part of the Council of Europe) has advanced European integration in several judgments, notably the 1963 Van Gend en Loos case, which established the principle of the supremacy of European over national law, and the 1979 Cassis de Dijon judgment, which laid down that goods sold in one country must be able to be sold in all. Other EU bodies include the Court of Auditors and the European Investment Bank, both based in Luxembourg, the Economic and Social Committee and the Committee of Regions, both based in Brussels – and a plethora of smaller agencies scattered right across Europe.2

These institutions operate collectively by the “community method”. This describes the classical path of EU legislation: a proposal is made by the Commission; it is adopted by co-decision between the Council and the European Parliament, often followed by “trilogue” between the two and the Commission to reconcile their positions; it is then implemented by national authorities and is subject to the jurisdiction of the Court of Justice. But at many times in the past, and again during the euro crisis, national governments, especially those of the UK and France, have jibbed against the community method. President de Gaulle’s Fouchet plan would have set up inter-governmental institutions alongside the Brussels machinery. The Maastricht treaty introduced two new “pillars” for foreign and security policy and for justice and home affairs, in which the roles of the Commission and the Parliament were limited and legislation was not generally justiciable at the Court of Justice, unlike most other EU activities.

In practice most such efforts to work outside the “community method” have proved unsatisfactory. The Fouchet plan did not get anywhere. The Maastricht pillars have, under the Lisbon treaty, been subsumed back within the first pillar. Yet many national governments, including now Germany, still like the simplicity of working inter-governmentally. During the euro crisis, Angela Merkel has often praised the “union method”, which downgrades the roles of the Commission, the Parliament and the Court of Justice.

Enter the ECB

Several institutions for the single currency were bolted onto the system after the Maastricht treaty was ratified. Foremost among these is the European Central Bank, which started work in June 1998 (it had a forerunner, the European Monetary Institute, set up in 1994). The ECB, which at German insistence is based in Frankfurt, home of the Bundesbank, sits at the apex of what is called the European System of Central Banks, to which all national central banks belong (even those from EU countries still outside the euro). The ECB has a six-strong executive board, headed by a president and a vicepresident, all of whom serve single eight-year terms. Its governing council consists of this board plus the governors of the national central banks of countries in the euro. It normally takes decisions by simple majority. The initial system of one vote per council member is to be superseded, most probably during 2015, by an arrangement that will give the executive board six votes, add four votes that rotate among the five biggest euro members and give the rest, no matter how many there are, 11 votes in total (this change creates at least the theoretical possibility that the Bundesbank’s president might not always have a vote on the council).

The ECB was modelled on the German Bundesbank but is in many ways even more powerful and independent. Its goal, fixed by the Maastricht treaty, is price stability (close to but below 2%), whereas the Federal Reserve, its American counterpart, is also required to pay attention to employment. Its operational independence in delivering the goal of price stability, which it defines itself, is also guaranteed by the same treaty. Unlike other central banks, it has no single government or finance ministry to interact with and report to, though its president testifies before the European Parliament and attends most meetings of the European Council and often EcoFin and the Eurogroup as well. In line with the Bundesbank model, when EMU arrived the ECB was not given overall responsibility for bank supervision, which stayed at national level, an arrangement that has since been deemed unsatisfactory, with the planned “banking union” giving supervision of most large European banks to the ECB. It also had no obligation to act as the system’s lender of last resort, a huge potential problem once it took over the operation of monetary policy from national central banks. One big difference between the ECB and most other central banks is that it is much smaller (it has a staff of less than 1,000) and also, because of the continuing role of the national central banks, a lot more decentralised. That makes the role of the president, the ECB’s public face, especially important.

Given this, it was foolish and dangerous when the European Council chose to welcome the new bank with an all-day wrangle in May 1998 over who should be its president. The job had long been intended to go to Wim Duisenberg, a former Dutch central banker who had run the European Monetary Institute. But at the last minute the French president, Jacques Chirac, put forward Jean-Claude Trichet for the job. The outcome was a botched and undignified compromise in which the term was informally split between the two men. Duisenberg stepped down in 2003, leaving Trichet to serve a complete eight-year term, until he in turn was replaced by an Italian, Mario Draghi, in 2011.

The lack of any strong political authority to act as a counterpart to the ECB was obvious from the start. The Commission has scarcely more accountability than the bank. The European Parliament is elected, but it has no executive authority. The European Council and EcoFin include non-members of the euro. From an early stage the French pushed for the creation of some form of “economic government”, but the Germans resisted the concept in order to safeguard the ECB’s independence.

Instead, in 1998 European governments came up with the idea of a “Eurogroup” of finance ministers.

Finance ministers from non-euro countries fiercely resisted the Eurogroup’s establishment. The UK’s Gordon Brown, then chancellor of the exchequer, tried hard to join as an observer at the group’s first meeting at the Château de Senningen in Luxembourg in June 1997, only to be told by his French counterpart, Dominique Strauss-Kahn, that the euro was like a marriage and that, in a marriage, one did not invite strangers into the bedroom (a precept that Strauss-Kahn has followed only erratically in his own life).

In any event the Eurogroup soon became accepted, and it even acquired its own permanent chairman: first, Jean-Claude Juncker, Luxembourg’s prime minister and finance minister, and then, from the end of 2012, Jeroen Dijsselbloem, the Dutch finance minister. By this time it had also become accepted, once again over objections from countries outside the euro, supported by Germany, that European heads of government should meet periodically in euro-zone summits, usually just after full European Councils. In either formation, the Eurogroup has no statutory basis and no legislative powers. But it has become an essential part of the single currency’s architecture.

Another component is the “excessive deficit procedure”. This began in the Maastricht treaty and was reformulated into the stability and growth pact, which was approved in 1997. However, from the very beginning the rules against excessive deficits and public-debt levels were interpreted flexibly, not least so that Belgium and Italy could join the single currency. The stability pact’s provisions for sanctions were watered down in negotiation from being automatic, as the Germans originally wanted, to requiring qualified-majority approval by the Council. Even so, the pact attracted much criticism from economists, who felt that, given euro-zone countries’ loss of an independent monetary and exchange-rate policy, more not less fiscal flexibility might be needed. It was also thought that imposing central rules might undermine the force of the treaty’s “no-bail-out” provisions, because it would imply a high degree of central intrusion. Better, many argued, to rely on the bond markets to impose discipline on any country that borrowed so much that it looked to be at risk of defaulting.3

The pact’s credibility was further dented in 2002 when Romano Prodi, president of the Commission, called it “stupid”. Portugal was the first country to get into difficulties, and it was duly required to amend its budget to comply with the pact. But it was never likely to constrain bigger countries and, in late 2003, its potency was almost entirely destroyed when France and, ironically, Germany itself persuaded the Council to override a Commission recommendation that both countries should cut their budget deficits, which had drifted above 3% of GDP.4

The gutting of the stability pact made it less of a surprise, when the financial crisis hit in 2008, that the deficits and debt levels of most euro-zone countries went above the Maastricht ceilings.

Naturally, the crisis also prompted calls for a revival of the excessive deficits procedure, but with new teeth. Its new incarnation, adopted in late 2011, includes the “two-pack” and “six-pack” and sets out a “European semester”. Euro-zone countries now have to submit their draft budgets to the Commission in advance, and the Commission can request changes before national parliaments even have a chance to consider them. A new excessive imbalances procedure has also been added, enabling the Commission to monitor and make recommendations for countries that, among other things, run large current-account imbalances (defined, with a nod to chronically underconsuming Germany, as 4% of GDP for deficits but 6% of GDP for surpluses).

In terms of sanctions, the new procedures look similar to the old except that now a Commission recommendation will be automatically adopted unless a qualified majority in the Council votes against it. Such a negative qualified-majority procedure is also enshrined in the “fiscal compact” treaty, which was approved and ratified in 2012 as an inter-governmental treaty using the “union method”, partly because several governments including France’s and Germany’s liked it that way, partly because the UK and the Czech Republic refused to sign it (the Czechs now plan to do so) and partly because it allowed the treaty’s drafters to provide that it would come into force even if some countries failed to ratify it. The fiscal compact requires all signatories to insert debt brakes into their national constitutional arrangements. It also formalises, with the Euro Plus Pact, the existence of euro summits, alongside European Councils.

The euro crisis has added a set of further, ad hoc pieces to the single currency’s institutional architecture, many of them also set up on the union method. First came the temporary European Financial Stability Facility (EFSF), an inter-governmental vehicle set up in a rush after the rescue of Greece in May 2010. Alongside this there is a smaller European Financial Stability Mechanism, which uses the EU budget as collateral. Both funds are being subsumed into the permanent treaty-based European Stability Mechanism (ESM). The ESM was set up as an organisation under public international law with a board of governors (that is, finance ministers) and a managing director, Klaus Regling, previously the Commission’s economics director-general. Although an inter-governmental body, the ESM has operational links to the Commission and is also subject to the jurisdiction of the European Court of Justice.

Treaties, treaties

One reason it is often hard for outsiders to understand how either the EU or the euro works is that, for the past 25 years or so, the entire European project has been going through a veritable orgy of treatymaking.

After the Single European Act of 1986 and the Maastricht treaty, signed in February 1992, there was but a short pause before the Amsterdam treaty of 1997 and then the Nice treaty of 2001.

Each time, it seemed, the driving force for successive treaties was a widespread feeling of dissatisfaction at what had been done on the previous occasion and at what had failed to be agreed or had been left out. The expansion of the European Union to take in Austria, Finland and Sweden in 1995 and, in a far bigger challenge, eight central and eastern European countries from the former Soviet block plus Cyprus and Malta in 2004 was another consideration.

Even as the euro emerged from infancy in December 2001, just before the date for the issue of euro notes and coins, EU leaders, meeting in Laeken in Belgium, decided to have one more go at their governing treaties. This time they set up a convention on the future of Europe, chaired by a former French president, Valéry Giscard d’Estaing, which swiftly decided, amid much excited chatter drawing analogies with Philadelphia in 1787, to draw up a complete new constitution for the EU. The text of this constitutional treaty was broadly endorsed by an inter-governmental conference and then adopted at a European Council meeting in 2004. But after that the trouble began, because no fewer than ten countries announced plans to put the draft constitution to national referendums before ratification.5

Several treaty referendums had been held before, and in some cases treaties had been rejected only to be put to the vote again (this happened in Denmark over Maastricht and Ireland over Nice). But never had so many referendums been promised at once. In the event, it should not have come as a huge surprise when two of the first four said no: in France on May 29th 2005 and then in the Netherlands on June 3rd 2005, in both cases by large majorities. The expedient of making a few modifications and asking single small countries to vote again was clearly not going to work with such large founder members. So the constitution was abandoned.

The immediate impact of this setback on the euro may have seemed slight. But it fostered a broader sense of crisis in the EU as a whole. One reason was that it made everybody leery of further attempts at treaty change, a feeling that has persisted into the euro crisis. The gloom was intensified by the coincidence of yet another row over the EU’s budget. Although the budget is small, at little more than 1% of EU-wide GDP, its excessive spending on agriculture and its skewed net benefits have caused repeated arguments at least since Margaret Thatcher came to power in the UK in 1979 and promptly demanded “my money back”. Her determined handbagging of fellow European leaders eventually produced a series of ad hoc rebates, followed by a permanent abatement of the net British budget contribution, which was agreed at a European Council in Fontainebleau in 1984.6

Despite this deal, subsequent negotiations on the EU’s multiannual financial framework have proved almost equally contentious, and the one in 2005 was no exception. The UK, which wanted a smaller budget, less spending on agriculture and to preserve its rebate untouched, was once again in the doghouse, but several other countries favoured budgetary cuts while the new members from central and eastern Europe wanted far more spending. A compromise was reached only at the end of the year, when the British prime minister, Tony Blair, gave up part of the rebate to ensure that the UK would bear a fair share of the costs of enlargement to the east. But the sour atmosphere helped to cloud much other business, including that of the euro. Juncker, as president of the Council, declared that the EU was “in deep crisis”.

The gloom also spilt over into the other big issue facing European leaders at the start of 2006: what to do about the failed constitutional treaty. On this the key person was the new German chancellor, Angela Merkel, who took office in late 2005 at the head of a “grand coalition” between her Christian Democrats and the Social Democrats. She was determined to revive as much as she could from the constitution, not least because the new voting system that it proposed at long last recognized that Germany’s population is larger than that of other EU countries. After her fellow centre-right leader, Nicolas Sarkozy, became French president in mid-2007, the two pressed ahead with what later became the Lisbon treaty, which incorporated most of what had been in the constitution but in a disguised and less comprehensible fashion.

Critics complained that reviving the treaty in this way was a backdoor route around the negative votes in France and the Netherlands. They objected even more vociferously when almost all EU leaders, including the French and the Dutch, said they would not try to ratify Lisbon by referendums but use parliamentary votes instead. The exception was Ireland, which was constitutionally required to hold a referendum. Yet again, Irish voters said no, this time in June 2008. But just over a year later, after the financial crisis had struck, they were persuaded to change their minds in a fresh vote, so Lisbon was finally approved in late 2009. The new permanent president of the European Council, Herman Van Rompuy of Belgium, and the new high representative for foreign and security policy, Baroness Catherine Ashton of the UK, were chosen at a summit shortly afterwards, after yet another wrangle. But by then the focus of attention was starting to shift to the crisis in Greece – and particularly to the fiscal problems of a newly elected Greek Socialist government

EU-Crisis explained

2. From the origins to Maastricht

THE EUROPEAN PROJECT was a consequence of the second world war and the cold war. How to tame the German problem that had led to two world wars? How to harness its economic power to rebuild Europe? And how to reconstitute the German army to help fend off the Soviet threat? The answer to these conundrums was to fuse the German economy within a common European system, and to embed its armed forces within a transatlantic military alliance.

Already in 1946, just a year after the war had ended, Churchill called in his Zurich speech for the creation of a “kind of United States of Europe”, to be built on the basis of a partnership between France and Germany:1

At present there is a breathing-space. The cannon have ceased firing. The fighting has stopped; but the dangers have not stopped. If we are to form the United States of Europe or whatever name or form it may take, we must begin now.

Four years later, with a strong nudge from the United States, the French foreign minister, Robert Schuman, produced a plan to integrate the coal and steel industries of France, Germany and anyone else who would want to join the project. This led directly to the creation of the European Coal and Steel Community (ECSC) in 1951.2

The solidarity in production thus established will make it plain that any war between France and Germany becomes not merely unthinkable, but materially impossible. The setting up of this powerful productive unit, open to all countries willing to take part and bound ultimately to provide all the member countries with the basic elements of industrial production on the same terms, will lay a true foundation for their economic unification.

This was the germ of the idea of European economic integration. Today the anniversary of the speech (May 9th) is celebrated as a holiday by the European institutions (known as Schuman Day).

The ECSC encompassed not only France and Germany, but also Italy and the three Benelux  countries, Belgium, the Netherlands and Luxembourg. Jean Monnet, a French civil servant and scion of a cognac-trading family, who was in many ways the éminence grise behind the entire European project, acted as the first president of its high authority.3

Schuman and Monnet followed the successful establishment of the ECSC with an attempt to set up a pan-European army, the European Defence Community. But this was a step too far for France. The plan was blocked by a vote in the French National Assembly in August 1954. Henceforth NATO would provide the necessary security umbrella, while European integration would focus on economic matters.

The Messina conference of 1955 prepared the ground for the signing in 1957 of the Treaty of Rome, under which the six European countries that had joined the ECSC established a European Economic Community (EEC), which proclaimed the objective of an “ever closer union”. The treaty established a customs union and envisaged the progressive creation of a large unified economic area based on the “four freedoms” of movement – of people, services, goods and capital. The EEC is the direct forerunner of today’s European Union.

Despite Churchill’s ringing call in 1946, the UK, always a sceptic about European political integration, had stood aside from the process. Indeed, Churchill himself was clear that the UK would encourage but not join European integration. The British Labour government refused to sign up to Schuman’s plan, with the then home secretary (and grandfather to a later European commissioner, Peter Mandelson), Herbert Morrison, declaring bluntly that “it’s no good: the Durham miners won’t wear it”.4 A later Tory government sent only a junior official to Messina, with clear instructions not to sign up to anything. Yet by 1961, only four years after the Treaty of Rome, the Macmillan government lodged an application for membership, only to see it blocked by Charles de Gaulle’s veto in January 1963.

Currency roots

The notion of a single currency was present at the very creation of the European project. Jacques Rueff, a French economist, wrote in the 1950s that “Europe will be made through the currency, or it will not be made”.5 The idea of a common currency has even earlier roots. Various exchange-rate regimes emerged in 19th-century Europe, including the Zollverein (customs union) and the gold standard. The Latin Monetary Union, set up in 1866, embraced a particularly unlikely sounding group:

France, Italy, Belgium, Switzerland, Spain, Greece, Romania and Bulgaria (even more bizarrely, Venezuela later joined it). When it started Walter Bagehot, editor of The Economist, delivered a warning that has a curious echo today:6

If we do nothing, what then? Why, we shall be left out in the cold … Before long, all Europe, save England, will have one money, and England be left standing with another money.

In the event, the Latin Monetary Union fell apart when it was hit by the disaster of the first world war.

The 1930s was another period of currency instability in Europe – and the world. The UK and the Scandinavian countries all chose to do the unthinkable in 1931 by leaving the gold standard and devaluing. A rival “gold block” led by France and including Italy, the Netherlands and Switzerland, chose to stay on the gold standard until 1935–36. As Nicholas Crafts showed in a 2013 paper for Chatham House, the early leavers did much better in terms of GDP and employment than the stayers – and France, which suffered a lot from clinging so long to gold, played a role equivalent to today’s Germany by hoarding the stuff and also insisting on running large current-account surpluses.7

Although the desire for currency stability carried through into the early years of the European project, the global system of fixed exchange rates linked to the dollar (and thus to gold) set up after the 1944 Bretton Woods conference that established the International Monetary Fund (IMF) and the World Bank seemed sufficient for most countries. But over time, and especially in France, the perception was growing that this system gave the Americans some sort of exorbitant privilege. This was one reason why the European Commission first formally proposed a single European currency in 1962. By the end of the decade, the revaluation of Germany’s Deutschmark against the French franc in 1969 created fresh trauma in both countries, which turned into renewed worries when the United States formally abandoned its link to gold two years later.

As the difficulty of living with a dominant but devaluing dollar increased, Willy Brandt, then German chancellor, revived plans for a currency union in Europe. His plan was taken up in the 1971 Werner report, named after a Luxembourgish prime minister, which argued for the adoption of a single currency by 1980. The report was endorsed in 1972 by all European heads of government, including those from the three countries that planned to join the club in 1973: Denmark, Ireland and the UK. Indeed, at a summit meeting of heads of government in Paris in December 1972, all nine national leaders, including the UK’s Edward Heath, signed up blithely not only to monetary union but also to political union by 1980. A last-minute attempt by the Danish prime minister to ask his colleagues exactly what was meant by political union was ignored by the French president, Georges Pompidou, who was in the chair.8

It was the final collapse of Bretton Woods, followed by the Arab-Israeli war and oil shock and then by the global recession of 1974–75, that upset most of these ambitious plans. Yet by then West Germany, always on the look-out for greater currency stability, had already set up a system linking most of Europe’s currencies to the Deutschmark, swiftly dubbed the “snake in the tunnel”. The idea was to set limits to bilateral currency fluctuations, enforced by central-bank intervention. However, it turned out that the snake had only a fitful and unsatisfactory life. The UK signed up in mid-1972, only to be forced out by the financial markets six weeks later. Both France and Italy joined and left the snake twice. Devaluations within the system were distressingly frequent. By 1978 there was still no sign of a general return to the Bretton Woods system of fixed exchange rates. So Europe’s political leaders came up with the idea of creating a grander version of the snake in the form of a European Monetary System (EMS). The EMS was mainly the brainchild of the French president, Valéry Giscard d’Estaing, and the German chancellor, Helmut Schmidt, although the president of the European Commission, Roy Jenkins, acted as midwife. In March 1979, the EMS came into being. Its main provision was an exchange-rate mechanism that limited European currency fluctuations to 2¼% either side of a central rate (or to 6% for those with wider bands). All nine members of the European Community joined the system – except, as so often, the UK (this meant, incidentally, that the EMS broke up one of Europe’s few existing monetary unions, that between the UK and Ireland).

Yet for all its ambitions, the EMS proved only a little more permanent and solid than the snake. Italy was at best a fitful and wobbly member. And the election in 1981 of François Mitterrand as France’s first Socialist president of the Fifth Republic led to repeated devaluations of the franc – until the president, under the guidance of his new finance minister, Jacques Delors, and his most senior treasury official, Jean-Claude Trichet, adopted a new policy of le franc fort. When a year or two later Delors arrived in Brussels as the new president of the European Commission, he was quick once again to dust down the old plans for a European single currency.

Enter Delors

The result was the Delors report, commissioned by European leaders in June 1988, which advocated a three-stage move towards European economic and monetary union (EMU). First, complete the single market, including the free movement of capital. Second, prepare for the creation of the European Central Bank and ensure economic convergence. Third, fix exchange rates and launch the euro, first as a currency of reckoning and then as notes and coins. The Delors report went on to form the basis of the Maastricht treaty, negotiated over 18 months and finally agreed on, with much fanfare, in the eponymous Dutch city in December 1991. The treaty was formally signed only in February 1992.

Maastricht laid the foundations for a new ECB and a single European currency, to be brought in either in 1997 or (at the latest) 1999. It also promised to make progress towards the parallel objective of political union; and it symbolically renamed the European Community the European Union.

The new treaty reflected above all the changed political situation in Europe after the fall of the Berlin Wall in November 1989 and the subsequent collapse of the Soviet empire. Mitterrand, in particular, was minded to accept German unification after the fall of the wall only if France could secure some control of the Deutschmark, which he feared would otherwise become Europe’s de facto currency. In effect, he had no wish to replace the dominance of the dollar with the dominance of the Deutschmark. Hence the underlying Franco-German deal at Maastricht.

The French had long favoured a new single currency, over which they hoped (vainly, as it turned out) to exert greater influence, in large part to offset the growing might of a newly powerful united Germany. In his turn, the German chancellor, Helmut Kohl, accepted the idea of giving up the Deutschmark, which many German voters as well as the Bundesbank were against, as a price for unification and as a giant step towards building a political union in Europe. Other countries signed up to this with more or less enthusiasm. As usual, the British concern was mainly to be allowed to opt out if they wanted, an objective that was easily secured by John Major, the prime minister, who told the press that the result was “game, set and match” to the UK.9

Besides a general (especially German) desire for currency stability and a wish to contain the power of a united Germany, two other forces were important in driving Europe along the road towards Maastricht and the decision to adopt a single currency. One was theoretical: the literature on shared currencies that began with Robert Mundell’s 1961 article outlining a theory of “optimum currency areas”. Mundell, a Canadian economics professor, posited that substantial welfare gains were to be had if a group of countries shared a currency – because of more transparent prices, lower transaction costs, enhanced competition and greater economies of scale for businesses and investors. But these gains needed to be weighed against the possible costs from losing both monetary and exchange-rate independence.10

Such costs, according to optimal currency-area theory, risked being especially high if the countries concerned suffered from internal labour-or product-market rigidities, had very different economic structures or were likely to be subject to asymmetric shocks. The theory went on to look at how groups of countries that did not meet these conditions could be changed to make them more suitable. The obvious remedies were more flexibility, notably in labour and product markets; greater labour mobility, so that workers who lost jobs in one country could move freely to countries with more job opportunities; and a substantial central budget that could transfer resources to countries that got into trouble. The 1977 MacDougall report had argued that, in the early stages of a European federal union, a central budget would have to be at least 5–7% of Europe-wide GDP, excluding defence (that is, 5–7 times the size of the existing European budget), if it was to be effective.11

The second force driving monetary union was a more practical one: the move towards a full single market that was being pushed forward by the Delors Commission, most notably by the British commissioner of the time, Arthur Cockfield. The Single European Act, approved and ratified in 1986–87, had paved the way for much greater use of qualified-majority voting (that is, a system of weighted majority as opposed to unanimity) on most directives and regulations. This was crucial to the adoption of the 1992 programme for completing the single market. With this step, what was about to become the European Union at last embraced, more or less in full, the four freedoms that had supposedly underpinned the project from its very beginnings: free movement of goods, services, labour and capital (the last remaining capital controls were abolished in 1990).12

The link between the single market and the single currency is not always clear, especially to Eurosceptics, who tend to prefer the first to the second. The reason it exists lies mostly in the fourth of the four freedoms: movement of capital. It is best summed up by the notion of the “impossible trinity” that became popular in the economics literature in the 1980s: the combination of free movement of capital, wholly national monetary policies and independent control of exchange rates was declared to be unworkable or even impossible because the three were likely to contradict each other. The solution, it was held both in the literature and by Europe’s political leaders, was not to revert to constraints on capital flows, still less to unpick the single market, but instead to press forward to a single currency.

Yet Mundell’s work also showed quite clearly that, outside a limited central group, Europe was a long way from being an optimal currency area. Labour and product markets were inflexible and overregulated. Workers’ mobility was limited, not just for obvious linguistic and cultural reasons between countries but even within them. Asymmetric shocks, far from being rare, were worryingly common: German unification was itself an example of one, as was the collapse of Finland’s trade with Russia in 1990 and the bursting of various property bubbles in the 1980s. And countries’ economies varied widely: Germany was strong in manufacturing but weak in services, whereas the UK was the reverse, for example, while national housing and mortgage markets differed hugely in their structure, operation, importance and sensitivity to interest-rate changes. The Maastricht negotiators were well aware of such problems, although many were swift to point out that the United States had a single currency without really being an optimal currency area either. But there were crucial differences between the American system and the euro zone.

Perhaps ironically, it was the UK’s David Cameron, prime minister of a country that will probably never join the single currency, who best summed up these defects, speaking 12 years after the euro was launched at a Davos World Economic Forum. As he then put it:13

There are a number of features common to all successful currency unions: a central bank that can comprehensively stand behind the currency and financial system; the deepest possible economic integration with the flexibility to deal with economic shocks; and a system of fiscal transfers and collective debt issuance that can deal with the tensions and imbalances between different countries and regions within the union. Currently it’s not that the euro zone doesn’t have all of these; it’s that it doesn’t really have any of these.

Instead of creating such structures, the creators of the euro limited themselves to devising a set of “convergence criteria” that national governments would be required to meet in order to qualify for membership of the European single currency. Yet, as many argued even at the time, they quite irresponsibly chose ones that had little to do with transforming Europe into something that might have more closely resembled an optimal currency area.

The right debate at Maastricht would have been about how best to push forward structural reforms to labour and product markets, how to improve countries’ competitiveness and current-account positions, how to create a backstop system of transfers or insurance and how to make sure that the putative European Central Bank could act properly as a lender of last resort. Plenty of commentators, including many from the United States and the UK, made such observations. One example was an article in The Economist in October 1998, which concluded:14

The current set-up looks unsatisfactory.The ECB should be recognised as lender of last resort. It could also be given central responsibility for financial-sector supervision.

In the event, the five criteria chosen for the Maastricht treaty were: low inflation and low longterm interest rates; two years’ membership of the exchange-rate mechanism of the EMS; and, most controversially of all, ceilings on public debt of 60% of GDP and on budget deficits of 3% of GDP.

Why were these last two tests chosen? The leaders of more prudent countries (that is, Germany and the Netherlands) argued that, if the single currency were to pass muster with sceptical financial markets and public opinion, limits would have to be set on potentially profligate public borrowers (by which they chiefly meant Italy and the Mediterranean countries).

But the truth was a lot more political. German voters were still hostile to the idea of giving up the Deutschmark. One reason was a widespread fear that Germany might end up having to bail out Europe’s most indebted countries, especially the most indebted of all: Italy. Thus the debt and deficit criteria were devised not so much on their economic merits, but rather in the expectation that they would keep Italy (and presumably also Spain, Portugal and Greece) out of the single currency, as these countries were expected to find it all but impossible to pass the two fiscal tests. The hope, in short, was that EMU would begin smoothly but with a small core group, essentially the Deutschmark zone plus (almost certainly) France.

Ready, steady, go

Two big events overturned this tidy plan. The first, which coincided ominously with the negotiation and signature of the Maastricht treaty, was yet another bout of financial-market jitters. Throughout the trauma of German unification, the EMS and its exchange-rate mechanism had continued to operate. Indeed, the UK chose to join in mid-1990, after a long and politically controversial experiment by the then chancellor of the exchequer, Nigel Lawson, to “shadow” the Deutschmark without informing his prime minister, Margaret Thatcher. The strain of keeping up with a strong Deutschmark soon began to tell, and it was considerably increased in November 1990 by the ousting of Thatcher, largely over the issue of the UK’s attitude to plans for the new European treaty that later became Maastricht.

But it was the aftermath of German unification in that same month that really got the markets going. This asymmetric shock may have cost West Germany a lot of treasure and required massive new investment, but its effect in the marketplace was to increase demand for the German currency.

That sent the Deutschmark soaring, hitting German competitiveness at a time when much of Europe was on the verge of recession or actually in it. The markets became even more jittery when, in a June 1992 referendum, the Danes narrowly said no to the recently signed Maastricht treaty. In early September French voters said yes, but by the thinnest possible majority. By then the strains on the UK, Italy and France itself of supporting their exchange rates to keep up with the Deutschmark had grown intolerable. In a dramatic week in mid-September, first Italy and then the UK were forced out of the EMS’s exchange-rate mechanism. And the German Bundesbank had to intervene heavily to keep France in (a trick it repeated in late 1993, when the permissible bands in the exchange-rate mechanism were widened to 15%).

Those involved in what the British later came to call “Black Wednesday” drew very different conclusions from it. France became convinced that a single currency, over which it still hoped to exert some political control, was more essential than ever, for without it the Bundesbank would remain paramount. The UK concluded that a currency straitjacket was a bad idea and that it could never rely on German support, so Black Wednesday came to be seen as another reason to stay out of a single currency, if one ever came into being (it is worth recalling that a young Cameron was a political adviser to the chancellor of the exchequer, Norman Lamont, at the time of Black Wednesday). Italy, Spain and other Mediterranean countries drew a different lesson still: they decided that, while a single currency might well impose pain on them, it would be better to do whatever they could to hop on board from the beginning rather than risk falling further behind.

Hence also the second big development in the 1990s: the response of the Mediterranean countries, most of which the Germans still wanted to keep out. The test case was Italy. In the early 1990s its budget deficit and, even more obviously, its public debt were way above the Maastricht targets. Yet there was bound to be some flexibility in the system, not least because Belgium, which as the seat of the European institutions and part of the Benelux trio was seen by all as an essential founder member of EMU, also had a public debt in excess of 100% of GDP. In 1996 Romano Prodi, who had become Italian prime minister just over a year earlier, spoke to his Spanish counterpart, José Maria Aznar, about the possibility of jointly standing aside from the third stage of EMU when it came. But Aznar replied that he, at least, was determined to join from the start. That drove Prodi not only to rejoin the EMS but also to redouble his efforts to cut Italy’s budget deficit to below 3% of GDP. Given the Belgian position, it was always going to be hard to exclude Italy on the grounds of its public debt alone. This became truer still when France and to some extent Germany itself had to massage their budget numbers to get below the 3% ceiling in 1997 and 1998.

As the likelihood that Italy would be a founder member of the single currency became ever more obvious, the German finance minister, Theo Waigel, started to press harder for a formalisation and tightening of the rules limiting budget deficits and debts after EMU had started, as well as before. The Maastricht treaty had laid down an excessive deficits procedure, but Waigel felt that it was too flexible. Instead, he demanded a new “stability pact” that would automatically impose swingeing fines on any country that ran a budget deficit above 3% of GDP. Most other countries, led by France, naturally resisted any automatic sanctions.

Eventually Waigel was forced to give ground: the fines would be imposed only with the approval of a “qualified majority” of member governments (excluding the miscreant). When in France a new Socialist government was formed after the party won the parliamentary election of June 1997, he even had to concede a change of name to turn it into a “stability and growth pact”. Ironically enough, his own boss, Helmut Kohl, lost his job just over a year later to his Social Democratic challenger. This meant that the two original champions of the euro – Kohl and Mitterrand – had both left office by the time it actually began (and the two countries also had nominally centre-left governments in 1999).

Their successors as German and French leaders, Gerhard Schröder and Jacques Chirac, felt less committed either to the euro in general or to the stability and growth pact in particular. Indeed, they were to become the first to breach its terms, in late 2003.

By late 1997, then, it was clear that all EU countries except Denmark, Sweden and the UK, all of which had opted out in one way or another, and Greece, which was miles from meeting any of the  criteria, would join the euro when it began life in 1999. Physical notes and coins followed only in 2002, partly because of the time said to be needed to print and mint them in sufficient quantities. In the meantime Greece quietly slipped in to join the single currency at the start of 2001, at a time when few people were looking. Perhaps worryingly, this echoed the story of Greece’s entry into the EEC in 1981. The Commission had given a negative opinion on Greece’s application, but it was overruled by national governments largely on the basis that, as France’s classically minded president, Valéry Giscard d’Estaing, put it, “one does not say no to Plato”.15 It also helped that Greece’s prime minister in 2001, Costas Simitis, was bothwas both Germanophile and German-speaking. After Greece joined, the fun really began.

The European Debt Crisis Visualized

EUROPE HAS LONG PRIDED ITSELF on being a model for the rest of the world of how to reconcile old enemies after centuries of war, blend the power of capitalism with social justice and balance work with leisure. Little matter that Europeans did not generate as much wealth as overworked Americans; Europeans took more time off to enjoy life. And little matter that Europe could not project the same military force as the United States; Europe saw itself as a “normative power”, able to influence the world through its ability to set rules and standards. Some Europhiles even imagined that Europe would “run the 21st century”, as the title of one optimistic book put it.

The collapse of subprime mortgages in the United States, and the credit crunch that followed, only confirmed such convictions. The single currency, the European Union’s most ambitious project, was seen as a shield against financial turbulence caused by runaway American “ultra-liberalism”, as the French liked to describe the faith in free markets. But when the financial storm blew in from across the Atlantic, the euro turned out to be a flimsy umbrella that flopped over in the wind and dragged away many of the weaker economies. It led to the worst economic and political crisis in Europe since the Second World War.

Starting in May 2010, first Greece, then Ireland and Portugal were rescued and had to undergo painful internal devaluation, that is, by reducing wages and prices relative to others. The process proved so messy and bitter that, even with hundreds of billions of euros committed to bail-outs, the currency several times came close to breaking up, potentially taking down the single market and perhaps the whole EU with it. The EU’s hope of becoming a global power dissolved as Europe became the world’s basket case. More than once, the United States forcibly pressed its transatlantic allies and economic partners to do more to fix their flawed currency union.

At the time of writing, in March 2014, the euro zone has survived the financial crisis – an achievement in itself, but won at too high a price. The euro zone bottomed out of its double-dip recession in 2013. But despite signs of “Europhoria” in markets the danger is far from over. Among Europhiles and Eurosceptics alike, there is a growing belief that the euro has undermined, and may yet destroy, the European Union. Instead of promoting economic integration, euro-zone economies have diverged. Rather than sealing post-war reconciliation, the euro is creating resentment between north and south. Far from settling the age-old German question, Germany has emerged as all-powerful. The decline of France has accelerated, and the ungovernability of Italy has been reaffirmed. Tensions between euro “ins” and “outs” have increased, particularly in the case of the UK, which now hovers ever closer to the exit.

The chronic democratic problem has become acute: the EU is intruding ever more deeply into national policymaking, particularly in the euro zone, without becoming any more accountable to citizens. Perversely, the clearest sign of a common political identity, the European “demos” that federalists hoped would emerge is to be found in anti-European movements. For now the riots and clouds of tear gas in Greece and the mass protests by Spain’s indignados may have faded away. But almost everywhere, apart from Germany, which has barely felt the crisis, indignant voters have thrown out incumbent governments and abandoned centrist parties in large numbers. Anti-EU and anti-euro parties are on the rise, of both left- and right-wing varieties, in both core and periphery countries, and in both euro ins and euro outs. The scariest are in Greece, which has both radical leftists and neo-Nazi extremists, and has witnessed murderous violence among their followers. But the most consequential may yet be the scrubbed-up, be suited populists in countries such as France, the Netherlands and the UK, which were hardly the worst hit by the debt crisis. They have already changed the terms of the European debate in these countries. Once the champion of EU enlargement, the UK is increasingly turning against the cherished right of free movement of workers, and against the EU itself.

As the countries of the euro-zone periphery seek to regain competitiveness, their most striking export has been young emigrants in search of jobs abroad. These are no longer the manual workers of yesteryear who filled the factories of Germany, the mines of Belgium and the building sites of the UK.

Now it is the young graduates who are on the move. In Portugal, the post-colonial flow has reversed, as hopefuls head out to Brazil, Angola and Mozambique in search of a better life. In Ireland, some churches have set up webcams so that émigré parishioners can watch services back home. Many have moved to other parts of Europe, notably Germany.

1. “If the euro fails, Europe fails”

IN THE SPRING AND SUMMER OF 2012 there was a fad in offering advice on how to break up the euro.

More than two years after the start of the Greek debt crisis, the experiment of the single European currency seemed to be close to failure. Successive bail-outs, crushing austerity and innumerable emergency summits that produced at best a half-hearted response were stoking resentment among creditor and debtor countries alike. And since national leaders seemed either unwilling or unable to weld together a closer union, the pressure of the euro crisis was remorselessly pushing the cracks apart. Better, thought some, to attempt an orderly dissolution than to be confronted with a chaotic break-up.

In May the former chief economist at Deutsche Bank, Thomas Mayer, proposed the introduction of a parallel currency for Greece, a “Geuro”, to help the country devalue.1 In July Policy Exchange, a British think-tank, awarded the £250,000 Wolfson Prize for the best plan to break up the euro to Roger Bootle of Capital Economics,2 a private research firm in London. The following month The Economist published a fictitious memorandum to Angela Merkel, the German chancellor, setting out two options for a break-up: the exit of Greece alone, and the departure of a larger group of five countries that added Cyprus, Spain, Portugal and Ireland as well. A footnote reported that the ever-cautious Merkel had turned down both possibilities, deeming the risks to be too great, and ordered the paper shredded.“No one need ever know that the German government had been willing to think the unthinkable. Unless, of course, the memo leaked.”3

The imaginary memo was closer to the truth than readers might have thought. That summer Merkel did indeed ponder, and reject, the idea of throwing the Greeks out of the euro. German, European and IMF officials had by then drawn up detailed plans to manage a break-up of the euro – not to dissolve the currency completely but rather to try to preserve as much of it as possible if Greece (or another country) were to leave. The plans never leaked, which was just as well. The mere existence of a contingency plan for “Grexit” might have provoked a self-fulfilling panic in markets. Few had confidence that any plan to oversee an orderly break-up would work. Officials thought the unthinkable on at least three occasions.

The first was in November 2011, when Greece announced a referendum on its second bail-out programme. Germany and France, outraged by Greece’s insubordination, demanded that the referendum question had to be whether Greece wanted to stay in the euro or not. For the first time, European leaders were openly entertaining the notion of Grexit. In the event the vote was abandoned after the fall, within days, of the prime minister, George Papandreou. The second moment of peril came between the two Greek elections in May and June of 2012, when the rise of radical parties of the left and the right increased the risk of the Greeks voting themselves out of the euro before cooler heads prevailed in the second ballot. (Even after the conservative leader, Antonis Samaras, had put together a government that belatedly committed itself to the EU adjustment programme, Merkel debated well into August over whether to expel Greece.)

The third danger point was the tough negotiation over the bail-out for Cyprus in March 2013. The newly elected president, Nicos Anastasiades, threatened to leave the currency if a bail-out meant destroying the island’s two largest banks and wiping out their big expatriate (mostly Russian) depositors. After two rounds of ugly negotiations Anastasiades succumbed to his rescuers. The euro zone would have been ill-prepared to cope with Grexit in late 2011. Jean-Claude Trichet, who presided over the ECB until the end of October 2011, would not countenance detailed doomsday planning. And without the central bank’s power to create money, a break-up might have been uncontrollable. Trichet’s successor, Mario Draghi, did set up a crisis-management team in January 2012. Within a year the ECB and the IMF had developed an hour-by-hour, day-by-day plan to try to manage the departure of a euro-zone member. By the time of the negotiations with Cyprus, admittedly a smaller country than Greece or the other rescued economies, the prospect of Cyprexit did not cause anywhere near the same degree of fear among officials, or markets.

Others also worked up contingency plans, not least in the European Commission and the European Council, though here co-ordination was weaker for fear of disclosure. “Everything in Brussels leaks,” says one of those involved. Officials recount how on one occasion Herman Van Rompuy, president of the European Council, raised the prospect of Grexit with José Manuel Barroso, president of the Commission. “I don’t want to know the details. But I hope you are taking care of it,” Van Rompuy said. Even so, his own small team of economists also quietly worked up position papers. It all made for a strange dance in the darkness. Within the Commission, staff at the economics directorate had been expressly ordered not to do any work on the response to a possible break-up, even though a discreet group of senior commissioners and officials did just that: plan for a split in the currency zone. They had two main purposes: first, to set out what would have to be done; and second, to make the case for why it should not be done. For others it was a matter of managing as well as possible. For all concerned a big dilemma was how much to tell the Greek authorities about the preparations for their country’s possible return to the drachma. The answer was: hardly anything at all.

Like the gold standard, only worse

Fixed exchange-rate systems have fallen apart throughout history, from the gold standard to various dollar pegs. But giving up a fixed peg is very different from scrapping an entire currency. This has happened too, but usually only when political unions have broken apart: for instance, the break-up of the Austro-Hungarian empire, the collapse of the Soviet Union or the velvet divorce between the Czech Republic and Slovakia. And none of these precedents quite captures the special circumstances of the euro. It is a single currency without a single government. It is made up of rich countries, many of which have built up large debts and large external imbalances, so the sums at stake are proportionately large. A map of the world sized according to each country’s government spending shows Europe as a huge, puffed-up ball of public money.4 Moreover, the euro zone is a subset of the European Union and its single market, within which goods, services, capital and people move more or less freely. As a result, the spillover effects on other European countries would be that much greater. It had taken years for countries to prepare for the introduction of the euro. If any left, they might have to adapt to the redenomination of a member’s currency overnight, or at best over a weekend.

Nobody could be sure about the consequences should the supposedly irrevocable currency become revocable. There were two prevailing beliefs. One was the amputation theory: severing a gangrenous limb such as Greece would save the rest of the body. The other was the domino theory: the fall of one country would lead to the collapse of one economy after another. Grexit might thus be followed by Portexit, Spexit, Italexit and even Frexit.

Given such uncertainties, the objective for officials preparing contingency plans was clear: regardless of which country left the euro, the rest must be held together almost at any cost. Those involved speak only in guarded terms about precisely what they would have done. Would the departure of, say, Greece have required Cyprus to leave as well, given their close interconnection? The ECB would have flooded the financial system with liquidity to try to ensure that credit markets did not dry up, as they had done after the collapse of Lehman Brothers, and to forestall runs on both banks and sovereigns. Large quantities of banknotes would have been made available in the south to reassure anxious depositors especially if, as during the Cyprus crisis, banks were shut down and capital controls imposed. The ECB would probably have engaged in unprecedented bond-buying to hold down the borrowing costs of vulnerable countries. Loans to countries already under bail-out programmes would have been increased, and some kind of precautionary loan extended to Spain and Italy.

The IMF would have helped Greece manage the reintroduction of the drachma. This would probably have required a transition period (perhaps as short as one month) involving a parallel currency, or IOUs akin to the “patacones” that circulated in Argentina after it left its dollar peg in

2000, though EU lawyers thought these would be illegal. The ECB would have dealt with the technicalities of adapting European electronic payment systems to the departure of a member. The Commission would introduce guidelines for capital controls. Greece might have needed additional aid to manage the upheaval, not least to buy essential goods. In what remained of the euro zone there would have been difficult decisions to take over the allocation of losses arising within the Eurosystem of central banks. National governments would have to decide who should be compensated for losses in case of default and the inevitable bankruptcies caused by the abrupt mismatch between assets and liabilities as the values of currencies shifted. They might also have increased deposit guarantees, although in some cases that might have done more harm than good if the additional liability endangered public finances in weaker countries – as it had done in Ireland in 2008.

Perhaps, thought some, there should be a Europe-wide deposit guarantee. Indeed, many thought there would have to be a dramatic political move towards greater integration. Nobody quite knew what form this might take, but it would have had to signal an unshakeable commitment to stay together. Without the infuriating Greeks, greater integration might even appear more feasible. Indeed, it was such a prospect that convinced some senior EU officials that it would be a good idea to let the Greeks go after all: not because contagion could be contained, as the Bundesbank would sometimes claim, but precisely because it could not. Grexit would be so awful that it would force governments to make a leap into federalism.

Safe, for now

All these considerations, and more, were on Merkel’s mind in the summer of 2012 when she decided instead to keep the Greeks in. Beyond the financial price, Germany could not risk the political blame for breaking up the currency and, potentially, the European project itself. As she had repeatedly declared since the first bail-out of Greece in 2010, “if the euro fails, Europe fails”.

Two other events changed the dynamics of the crisis. First, at a summit in June, Merkel and other leaders agreed to centralise financial supervision around the ECB and then have the option of recapitalising troubled banks directly from the euro zone’s rescue funds. The move held out the promise, for the first time, of a banking union in which the risks of the financial sector would be shared. The aim was to break the doom-loop between weak banks and weak governments that threatened to destroy both, especially in Spain. The second, even more important, development that summer was Draghi’s declared readiness to intervene in bond markets without pre-set limits, on condition that troubled countries sought a euro-zone bail-out and adjustment programme. He thus sharply raised the cost of betting against the euro – to the point that, at the time of writing in March 2014, Draghi’s great bluff has yet to be called.

The euro has been saved, at least for a while. But even as economic output begins slowly to recover, the euro zone remains vulnerable and the wider European project remains under acute strain. As The Economist’s imaginary memo to Merkel noted, the contingency plans for the demise of the euro were never shredded; they were merely filed away. As The Economist’s imaginary memo to Merkel noted (see cover story headlined “Tempted, Angela?” in the issue of August 11th–17^th 2012, the contingency plans for the demise of the euro were never shredded; they were merely filed away.