Hubris, realism and the European project by Adair Turner
The CER was born in optimistic times. It seemed that the European Union, by completing the European single market, could deliver increased prosperity. The EU seemed to underpin peace in a once wartorn continent. And membership was the vital aspiration of Eastern European countries freed from Soviet domination. Even within a British political culture ever wary of grand visions, many saw noble purpose in the European project. In one crucial way the hopes of 1995 have been achieved, with 11 countries of Eastern Europe now peaceful, democratic members of a united Europe. There must still be much good in a Union so many have wished to join, and which others still aspire to. But the optimism of the 1990s is gone. Europe is mired in low growth, and beset with increasing political tensions. Few in Britain now talk of the EU’s noble purpose without fear of derision. Economic and Monetary Union (EMU) obviously played an important role in creating today’s tensions. Many people close to the CER, myself included, initially supported that project. We must understand what went wrong. Paradoxically, the problems derived both from too much grand political vision and too much faith in free markets. The euro was in part a political project, a ‘next step’ in the creation of an ever closer Europe, justified at times by economically meaningless rhetoric about the need to ‘stand up to the dollar’
or contain the Bundesbank’s power. But EMU also seemed justified as an impeccably free-market project, driving forward completion of the single market and supporting in particular the free flow of capital. The European Commission confidently asserted in its 1991 report ‘One market, one money’, that the single currency, by eliminating exchange rate risk, would unleash capital flows across the currency union, allocating capital efficiently to the highest-return projects, and driving faster convergence in productivity and income levels. Part of that story certainly came true: we saw hugely increased capital flows, the flipside of massive current account surpluses and deficits. But far from fostering the efficient capital investment which free market theory predicted, these flows supported wasteful real estate investment in Spain and Ireland, and unsustainable public deficits in Greece. Just as in the US’s subprime mortgage boom, more complete financial markets produced inefficient