Mody 2018: EuroTragedy

Summary
Mody traces the coming-into-being of the European monetary union (EMU). He tries to give an account not only of the actions of central political actors (chiefly, the German and French heads of government) but also explain their motivations. However, he concedes defeat in this attempt at crucial moments: He cannot fathom why Kohl pushed the EMU against all economic reasoning and the interests/opinions of several powerful subnational German actors.

He uses mainly secondary literature, but also quotes Kohl, Mitterrand and influential politicians surrounding them. He focuses on the lead-up to the Maastricht treaty, chronologically

The narrative is unambiguous: Economic reasoning was 100% clear (against EMU), and the governments of FR and DE pushed ahead, one or the other leading the cause at different points in time, because of vague political reasons – which Mody does not bother to explain in detail.

Critique
Mody is a wise guy: As hindsight is easier than foresight, from his comfortable vantage point of 2018 he can easily point out how the design of the EMU caused / exacerbated the later economic crisis. But while giving ample space to all the critics of the EMU (duly citing voices both before and after its construction), he omits the economic reasoning supportive of the construction of the EMU.

Example: “For nearly half a century […] fixed [exchange] rates had generated crises without providing any benefits.” Mody does not try to comprehend why governments had persisted with fixed exchange rates. Furthermore, Mody uses (here and elsewhere in the text) problems of fixed exchange rates as arguments against a monetary union; but of course the two are not the same thing. For example, French economic reasoning might have been resting on the fact that a monetary union makes speculative attacks against member states impossible (and these happened frequently when currencies were pegged to one another). Thereby, countries would avoid the accompanying loss of foreign reserves (to prop up their currencies against a speculative attack), forced interest rate hikes (which attract foreign capital, thus prop up the currency, but slow-down the economy) and/or currency devaluation.

Mody does not try to understand Kohl’s turn-around. For what reasons did Kohl see the EMU as a step towards political union (so dear to him)? Did he anticipate its failure under current policies and thought that fiscal union would therefore soon have to be implemented? Mody is weak on fathoming Kohl’s motivations because he does not have Kohl’s private communications at his disposal, only his public speeches.

 

Claims
All European government heads were irrational (FR: wanted EMU to overcome humiliation of again and again having to devalue against D-Mark; IT: wanted to prevent the humiliation of not being part of the club, thus joined although its economy wasn’t ready; DE: Kohl came to see the EMU as a first step towards further political integration.)

CLAIM: Kohl’s agency was decisive. Against:
 * advice from central bank
 * consensus of international economists

CLAIM: Kohl was a strong supporter of European political integration (because of personal/biographical conviction to European peace).
 * will of German business
 * popular German sentiment

But in remains unclear why such commitment to European political integration, led Kohl to eventually support (and push for) the EMU (and even include Italy in it).

Kohl might have believed that EMU was important for peace. Or he might have accepted the French idea of monetary union as a first step to political integration (but unclear how this French belief works / whether it’s really present).

Mody offers a partial explanation by (implicitly) suggesting that Kohl might have been reassured by French commitments to budgetary discipline: The French (and all others) did accept clear budgetary rules, complete with possible sanctions (while publicly claiming their fiscal sovereignty would not be compromised).

CLAIM: French agency (demanding an EMU) was an important pre-condition. But the motivation for pushing for EMU remains unclear: Maybe aversion to devaluation with respect to D-Mark (because of perceived loss in national prestige).

Evidence
Evidence largely limited to secondary literature: Biographers and previous treatments of same subject.

How does Mody arrive at his conclusion? He reconstructs intentions (and internal negotiations) of the most influential politicians (formally deciding heads of government) through

-         public statements

-         logical analysis of possible motivations for actions (also considering the opinions of actors whose opinion deciders might have taken into account: public opinion, economists)

-         assessments of people close to them and eyewitnesses (e.g. other politicians present at negotiations) (cross-checked? systematic?)

-         and partly autobiographical statements made retrospectively

But no systematic treatment, especially not of alternative hypotheses (what evidence would be expected?) In other words, missing is a systematic breakdown of which actors might have been relevant, and what actions and statements to expect from them for alternative hypotheses before the collection of empirical bit and pieces supporting his position.