The Tragedy of the Euro [Paperback]

One of the most exciting publications during the Christmas season was a book by Prof. Philipp Bagus entitled "The Tragedy of the Euro". Bagus is an associate professor of economics at Universidad Rey Juan Carlos, Madrid and a visiting professor at Prague University. He has long been one of the most vocal critics of the monetary union as he cried, like the ill-fated Cassandra, in vain for fiscal sanity during the boom. He has now provided us with the intellectual muscle needed to counter the propaganda and spin advanced by the intellectuals and fanatics of Euroland.

His introduction lays out clearly what he intends the reader to learn from his book:

"The project of the Euro has been pushed by European socialists to enhance their dream of a central European state. But the project is about to fail. The collapse is far from being a coincidence. It is already implied in the institutional setup of the EMU, whose evolution we will trace in this book. The story is one of intrigue, and economic and political interests. It is fascinating story in which politicians fight for power, influence and their own egos."

In this work he traces how differing concepts of European unity have been fighting it out for decades. On the one side are the founders of the European project, men such as Konrad Adenauer from Germany, Robert Schuman from France and Alcide de Gaspari from Italy, all practicing Catholics. Their view was of a Europe of independent sovereign states who cooperated in the removal of the protectionist walls and tariffs that had crippled European trade in the 1930s, brought about vast food shortages and brewed toxic hostility between nations. Their view of Europe Bagus describes as "the Christian view" of Europe, built largely upon the Catholic social teaching of "subsidiarity", the idea that social matters ought to be handled by the smallest, lowest or least centralized competent authority.

Opposed to "the Christian view" of Europe was what Bagus describes as the "socialist view" or "empire view" of Europe. These men, many of whom were of French extraction such as Jacques Delors and François Mitterrand, dreamed of a single European government ruling the entire continent. They were simply the resurrection of the pre-war ideologues of Europe in new clothes who sought the annihilation of national identity and Europe's cultural legacy.

In the midst of all this lay the central problems of European unification, especially the currency problem. Bagus brilliantly re-counts the political and economic warfare that took place behind the scenes in the decades leading up to the establishment of the European Monetary Union. In particular, he explains how the French government held Germany to ransom and threatened to prevent the unification of East and West Germany lest Germany sacrifice its treasured Deutschmark to the EMU.

To the layman, this is an essential read to understand how the international banking system operates and why it is so unstable. To Bagus, the clock is ticking down before a crisis an order of magnitude greater than the current one humbles Europe to its knees. He is intent to ensure that the layman can articulate what the causes were and what the solution has to be so he will not be led astray by the plethora of poorly thought-out solutions the public is presented with as being "the only alternative". The solution of course is a return to the rule of law in the banking system that has been given special privileges for too long in the name of the unsound and destructive economic doctrine of Keynesianism.

This review appear in the Sovereign Independent Newspaper in Ireland in January 2011.

I can highly recommend this book. It's short and easy to read, but very informative. It gives a much needed overview of the history and organization of the euro, and what the role is of the ECB and the national central banks. Bagus focuses on the incentives that come into play in such a system (the title is in reference to the so-called "tragedy of the commons"). These incentives turn out to be the key to understanding the current crisis in the euro area, with countries such as Greece on the brink of bankruptcy.
Mandatory reading material for every politician, journalist, and in fact every citizen of the euro area.

Philipp Bagus provides one of the more comprehensive (and perhaps most succinct) looks at the history and current state of affairs of the euro (and more broadly speaking, the European Monetary Union). He partakes in some good old fashioned political economy to provide the reader with a background on the real forces pushing for the common currency. While economic rationales are, for the most part, sparse, there are many political reasons at force driving for monetary integration. Among them, as Bagus outlines, is a desire to keep German industrial strength at bay by some other leading European nations (both core and periphery).

He also gives good insight into the current problems plaguing the common currency area. In particular, focus is placed on adjustments prohibited from taking place due to costs across member countries all being denominated in the same currency (and, perhaps more importantly, the same value currency). This brings the relative uncompetitiveness of the periphery into light alongside the uber-productiveness, especially in terms of the real costs of production, of the core.

In the interest of full disclosure, I have collaborated with Bagus on projects in the past. I don't agree with every part of this book (I do think that he absolves Germany of more blame for the current mess than is worthy), but I do think it is the easiest read to quickly grasp the true nature of the economic malaise the continent has wrought on it from the common currency. It is easy for laymen to understand, and I (as an academic) was able to also take some new tidbits away from it.