A Vulnerable Equilibrium
A clear-eyed look at how the euro crisis unfolded — and what the future holds.


Andrew Stuttaford

He ate poisoned cakes and he drank poisoned wine, and he was shot and bludgeoned just to make sure, but still Rasputin lived on. And that gives me just enough of an excuse to use the mad, almost indestructible monk to begin an article about a mad, possibly indestructible currency. The euro has crushed economies, wrecked lives, toppled governments, broken its own rule book, made a mockery of democracy, defied market economics, and yet it endures, kept alive by the political will of the EU’s elite, fear of the alternative, and the magic of a few words from Mario Draghi, the president of the European Central Bank (ECB) back in July 2012.

Speaking to an investment conference, Draghi said that, “within our mandate” (a salute to watchful Germans), the ECB was “ready to do whatever it takes to preserve the euro.” “Believe me,” he added, “it will be enough.” Those few words, and their implication of dramatic market intervention, did the trick. Financial markets calmed down, and there are now even faint hints of economic recovery in the worst corners of the euro zone’s ER. And all this has happened without the ECB’s actually doing anything. Simply sending a signal sufficed.

The crisis has been declared over by the same Brussels clown posse that always declares the crisis over. They may be right, they may be wrong, but a calm of sorts has descended on the euro zone — not peace exactly, but quiet, punctuated occasionally by tremors that may be aftershocks, but could be omens of fresh chaos ahead.

That makes this a good time to take a look at The Fall of the Euro, a guide to the EU’s vampire currency by Jens Nordvig, global head of currency strategy for the Japanese investment bank Nomura Securities. If you are looking for a quick, clear, accessible account, free from financial mumbo-jumbo, that explains how the euro came to be, why trouble was always headed its way, what was done when the storm broke, and what might happen next, this book (which was published last autumn) is an excellent place to start.

It is written from the point of view of a market practitioner. Nordvig is not too fussed about the deeper European debate. He mainly wants to know what works. Here and there he will nod politely to democratic niceties, but this is a book where worries over lost sovereignty are dismissed as “sentimental.” Overall, Nordvig is a supporter of closer European integration (“a noble ideal,” he maintains — it isn’t, but that’s another story), but one with considerably less time for illusions than most in his camp.

And the euro, he argues, was built — and run — on illusions, the illusion that Germany was Italy, Italy was Portugal, and Portugal was Finland, the illusion that one size would fit all. Its creation was a “reckless gamble.” Politics prevailed over economics. No one made any preparations for the rainy day that could never come. The foundations for catastrophe were laid, and then built on by regulators, policymakers, and financial-market players only too happy to believe that the impossible was possible. Imbalance was piled on imbalance, and a shared currency masked the nightmare developing underneath. Employed by Goldman Sachs at the time, Nordvig saw how markets viewed the euro zone as an indivisible whole. But Greece was still Greece. And Germany was still Germany.

“Policy makers,” writes Nordvig, “can attempt to circumvent the basic laws of economics, but over time, the core economic truths take their revenge.” Unsustainable boom was followed by what has seemed, until recently, like permanent bust.