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The Birth of the Euro

Otmar Issing, Cambridge University Press, 2008, 260 pages, £45.00.

Otmar Issing, formerly a member of the board of the European Central Bank, is among the principal intellectual architects of Europe’s single currency. In The Birth of the Euro he provides a stimulating and authoritative account of the origins and philosophy of a venture that he rightly describes as historically unprecedented. There have been currency unions, but there has never before been an arrangement whereby “sovereign states ... cede their authority in the monetary sphere to a supranational institution, while retaining a greater or lesser degree of autonomy in other areas.”

Ten years on from monetary union, and seven years since the first issue of euro notes and coins, the new currency has beyond argument been a success. Issing succinctly recounts how the euro has become an anchor currency, with more than 50 countries using it as an anchor for their own monetary policy; a transaction currency, for use in foreign exchange transactions; and the alternative reserve currency to the dollar. These characteristics reflect investors’ expectations of the euro’s future stability. Through its focus on the goal of price stability, the ECB has earned credibility. This is to the benefit of the 16 national economies now within the eurozone, but especially those with a previous history of inflationary problems.

For a British observer, these undemonstrative achievements of European monetary union contrast with the fierce domestic controversy that the subject provokes. Issing’s book will have no effect on those who believe the euro is a conspiracy to obliterate British national identity. It ought to be read urgently, however, by commentators who erroneously believe that fixing the exchange rate is comparable to the plainly bad idea of fixing the price for any other product. There are macroeconomic costs to joining a currency union: the most significant is that a member state can no longer offset an asymmetric exogenous shock through the exchange rate. But the microeconomic argument is as compelling as the case for liberalising trade: both policies have large welfare benefits. The single currency is a liberalising measure that reduces transactions costs and increases price transparency.

The more difficult questions about the euro concern the relation between monetary and fiscal policy. There is an unresolved tension in an arrangement where monetary decisions are taken by a supranational body while national parliaments retain control of public finances. Issing’s discussion is particularly valuable where he speculates on how this balance of responsibilities might develop. He believes the tendency of European statesmen to regard monetary union as a way of forging a common European foreign policy – let alone a common European citizenship – is misconceived. He is surely right on this, and his point extends more widely.

There are two principal ways which European policy makers might undermine public confidence in monetary union. One would be to centralise political decisions (as opposed merely to coordinating them among national governments), and thereby substantiate the charge of populist campaigners that the euro is a threat to self-government. The other – an idea to which the British labour movement was partial in the heyday of Thatcherism – would be to regard the European project as incomplete without Europe-wide social legislation. If there is one message that supporters of the European ideal might profitably take from this wise and important work, it is that not every step towards political integration serves the long-term interests of the single market and monetary union.

Oliver Kamm

Leader writer, The Times

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