A Europe Made of Money; Making the European Monetary Union

In This Review

A Europe Made of Money: The Emergence of the European Monetary System (Cornell Studies in Money)
by Emmanuel Mourlon-Druol
Cornell University Press, 2012
368 pp. $55.00
Making the European Monetary Union
by Harold James
Belknap Press of Harvard University Press, 2012
592 pp. $35.00

Most analysts agree that the ongoing financial crisis in Europe stems at least in part from flaws in the design of the euro system and that stabilization will require substantial institutional reform. This raises a vital historical question: Why did the European leaders who designed the European Central Bank and the other eurozone institutions leave out so many crucial elements? To answer this question, Mourlon-Druol considers the 1979 creation of the European Monetary System, the predecessor of the eurozone. He argues that the earlier system was weaker than it seemed, because participating governments disagreed about economic priorities -- just as they do now. Germany prioritized the maintenance of anti-inflationary stability through austerity, whereas other countries sought more permissive policies. Just as today, the countries hoped to solve these conflicts by agreeing to modest monetary steps and hoping that, in the long term, their economic preferences would converge. Looking back, that was wishful thinking.

James, a colleague of mine at Princeton University, picks up the story, explaining how European governments agreed to a large-scale monetary integration in 1991 and then enacted it a decade later. Many critics now contend that European leaders did not think through the consequences of those steps or that they sought to promote the recent reunification of Germany no matter what the consequences. James shows that is not the case: the leaders did not act in response to German reunification, and they were fully aware that the system lacked essential fiscal rules and banking regulations that would encourage economic convergence, but they reckoned that these elements could be added later or might even prove unnecessary.

Both scholars make extensive use of newly available documents of the eu’s monetary committees. This leads them to emphasize -- perhaps overemphasize -- the real-world effect of these committees’ ideas about integration. Still, both books add pieces to what is likely to be an important historiographical puzzle for some years to come.