A Lecture by Professor Harold James

1. The Euro and the
Battle of Ideas
Markus K. Brunnermeier,
Harold James,
Jean-Pierre Landau
EUI Florence, November 22, 2016

2. 2001

3. 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.”

4. 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

5. The Rhine divide
• Discretion
• Solidarity
• Liquidity/fear of
contagion
• Stimulus/Keynesian
demand management
• Rules
• Liability
• Solvency/fear of
moral hazard
• Austerity/Reform

6. Brunnermeier,James&Landau
Ghost of Maastricht “Rhine Divide”
“French” “German”
1. Discretion Rules
2. Solidarity Liability
3. Liquidity Solvency
• multiple equilibria E[NPV]>0, at what discount rate?
“big bazooka” “throw good money after bad”
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7. Brunnermeier,James&Landau
“French” “German”
1. Discretion Rules
2. Solidarity Liability
3. Liquidity Solvency
4. Keynesian Stimulus Austerity/Reform
Demand Supply
• Output gap unsustainable credit boom
• Reforms in boom Reforms in crisis (political economy)
Ghost of Maastricht “Rhine Divide”
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8. Brunnermeier,James&Landau
Maastricht’s stepchild
1. Contagion, Spillover and Systemic Risk
• Bailout Bail-in
2. Diabolic (Doom) Loop Gov. bond is not a safe asset
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9. Brunnermeier,James&Landau
Maastricht’s stepchild
1. 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 asset
Flight to safety
10

10. Brunnermeier,James&Landau
Aristotle
Aristotle: 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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11. 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.”

12. 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’.”