Faculty Book: Brexit May Benefit Embattled Euro

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In some ways, Britain’s vote in June to leave the European Union shouldn’t have been surprising: The United Kingdom has always maintained an arm’s-length relationship with Europe — for example, refusing to adopt the euro.

Yet Brexit raised questions about whether other disgruntled nations may also leave, which could threaten the euro’s future as the currency of 19 of the 28 EU nations.

Ultimately, neither Princeton economist Markus Brunnermeier nor history professor Harold James — authors of a new book on the euro — believe the currency is doomed. “Some [other] countries may exit,” Brunnermeier says. “But in the big scheme of things, I think the euro will remain.”

Their book, The Euro and The Battle of Ideas — co-written with Jean-Pierre Landau, a former deputy governor of the Banque de France — outlines the awkward economic partnership that the currency has created among EU countries.

Stitching together a monetary union from once-rival nations has been challenging, and the EU managed to do so without establishing formal fiscal ties. While eurozone nations have shared a common currency since 1999, they don’t, for instance, have the authority to shape one another’s tax or budget policies. Nor are they allowed to directly bail out one another’s debts.

Brunnermeier, James, and Landau began working on this book in 2012, when Europe’s debt crisis was reaching a fever pitch: Greece’s economy was in free fall as the unemployment rate rose above 20 percent; borrowing costs spiked in Italy, reflecting growing concerns about that economy; and Spain’s banking sector faltered, requiring a government bailout. Policymakers in France and Germany, the EU’s economic powerhouses, were at loggerheads about how to address this fast-moving crisis, which was shaking global confidence in the euro.

“In 2012 and then in the immediate aftermath of Brexit, there was indeed this feeling: ‘Is the European project collapsing?’” James notes in an interview.

The authors illustrate how a clash of ideologies — Germany’s desire for a decentralized economy with individual responsibility versus France’s belief that the state should play a large role in planning — has long threatened the euro.

For decades, both French and German policymakers viewed the UK as a necessary ally in this war of economic ideas, the authors write. The Germans felt that the British provided a strong voice for free-market solutions, while the French looked upon the British as a check against German dominance in the region.

It is possible, says James, that if the UK does leave the European Union, the Germans and French could enjoy more effective bilateral negotiations in the absence of a third voice. Brexit may also force the remaining EU countries to tighten their relationships on specific issues, though closer fiscal ties are unlikely. “There are strict areas where greater cooperation can occur — for instance, in dealing with common security issues or with refugees,” says James. And, he adds, a modest shift like this may be enough to keep the experiment with the euro going.