The Euro and the Battle of Ideas

Markus K. Brunnermeier, Harold James, Jean-Pierre Landau

EUI Florence, November 22, 2016

2001

Walter Bagehot (1869)

“In that case, there would be one Teutonic money and one Latin money; the latter mostly confined to the West of Europe, and the former circulating through the world. Such a monetary state would be an immense improvement on the present. Yearly one nation after another would drop into the union which best suited it; and looking to the commercial activity of the Teutonic races, and the comparative torpor of the Latin races, no doubt the Teutonic money would be most frequently preferred.”

Culture Clash

• Ideal types (Max Weber) • Madame de Staël: “French and Germans are at

two extremities of the moral chain, because the former consider external facts as the motor of all ideas, while the latter think that ideas generate all impressions. The two countries nevertheless are in basic agreement on social relations, but there is nothing more opposed than their respective literary and philosophic systems.” De l’Allemagne

The Rhine divide

• Discretion• Solidarity• Liquidity/fear of

contagion• Stimulus/Keynesian

demand management• Rules• Liability• Solvency/fear of

moral hazard• Austerity/Reform

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Ghost of Maastricht “Rhine Divide” “French” “German”1. Discretion Rules2. Solidarity Liability3. Liquidity Solvency • multiple equilibria E[NPV]>0, at what

discount rate?“big bazooka” “throw good money

after bad” Draghi speech

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“French” “German”1. Discretion Rules

2. Solidarity Liability

3. Liquidity Solvency

4. Keynesian Stimulus Austerity/ReformDemand Supply • Output gap unsustainable credit boom• Reforms in boom Reforms in crisis (political economy)

Ghost of Maastricht “Rhine Divide”

“Rhine-divide”

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Maastricht’s stepchild1. Contagion, Spillover and Systemic Risk• Bailout Bail-in

2. Diabolic (Doom) Loop Gov. bond is not a safe asset

Brun

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Maastricht’s stepchild1. Contagion, Spillover and Systemic Risk• Bailout Bail-in

2. Diabolic (Doom) Loop Gov. bond is not a safe asset

3. Cross-border no EA-wide safe assetFlight to safety

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Brun

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AristotleAristotle: Nicomachean Ethic“When the law speaks universally, and a case arises on it which is not covered by the universal statement, then it is right, where the legislator fails us and has erred by oversimplicity, to correct the omission-to say what the legislator himself would have said had he been present, and would have put into his law if he had known.”

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Il Principe, Ch. XVIII

• “For this reason a prince ought to take care that he never lets anything slip from his lips that is not replete with the above-named five qualities, that he may appear to him who sees and hears him altogether merciful, faithful, humane, upright, and religious. There is nothing more necessary to appear to have than this last quality, inasmuch as men judge generally more by the eye than by the hand, because it belongs to everybody to see you.”

Tommaso Padoa-Schioppa letter to Karl Otto Pöhl

• “To couple the defence of monetary orthodoxy with that of the institutional status quo may lead to defeat in terms of both monetary stability and independence. Your ‘monetary constitution’ has been too successful on the fight for stability. It will now either become the monetary constitution for Europe or be contaminated by the sins of the others. That is, by the way, a very ‘deutsches Schicksal’.”