Book review: The Value of Money

“The Value of Money: Controversial Economic Cultures in Europe: Italy and Germany”, publisher Villa Vigoni[1]


In 9 AD, the Roman general Publius Quintilius Varus led a force of three legions across the Rhine and deep into German territory.  There, at the Battle of Teutoberg Forest, his entire army (numbering with their support personnel about 30,000 men) was overwhelmed and slaughtered by a confederation of German tribes.  Varus himself lost his life and the battle passed into German folklore as a great national triumph over the might of Rome.

I mention this not because it was a rare defeat for the legions, nor even because it signalled the end of serious Roman attempts to bring the lands east of the Rhine into the Empire – they never did, and many people claim that this divide between the lands which were Roman and those which were not is still visible in Europe today.  No, I mention it because of the interesting fact (to a 21st century observer) that it was the Latins who were orderly, methodical and rules-obeying and the Germans who were spontaneous, free-thinking and broke the rules.  And it was the orderly rules-obeying Latins who came off second best.

This picture of Latin order versus German flair is rather counter to modern perceptions.  Many people characterise the European Union today as a union between Northern Europeans who espouse rules and order and who as a result succeed and prosper, and Southern Europeans who prefer flair and discretion, and as a result tend to do less well.

This is somewhat of an oversimplification of the EU in general.  But there is one small part of the EU’s collective life where the cliché of Northern rules versus Southern discretion does appear to have slightly more validity, and that is in the world of finance, and specifically central banking.

There is no doubt that in the five decades between the end of the Second World War and the coming of the euro, Germany, and those countries whose economies have been tied closely to it, pursued a more rules-based style of central banking than their Southern equivalents, and little argument either that they were more successful, as measured by inflation, the preservation of the purchasing power of their currencies and so on.

This leads to two interesting questions:  how to explain the different cultures in northern and southern central banking, and what it implies, twenty years into Economic and Monetary Union, for the European Central Bank as it aims to provide one common style of central banking for all parts of the Eurozone.  Can it succeed in creating a synthesis of the central banking traditions it inherits, or is it destined to choose one style over the other?

Attempting to answer these questions is a new book “The Value of Money: Controversial Economic Cultures in Europe: Italy and Germany”, a collection of some two dozen essays by leaders in the field and edited by a formidable quartet in C. Liermann Traniello, T. Mayer, F. Papadia and M. Scotto.

Without doubt the historical analysis in the book’s essays is very strong.  The twenty or so authors of the various chapters have a vast experience of central banking and finance between them, several of them having held very senior positions at the ECB and other central banks, and their analysis of the past is insightful, interesting and thought-provoking.  The backgrounds of German and Italian central banking are thoroughly explored, and the myth that the Banca d’Italia has always been less successful in preserving the value and purchasing power of its currency is fully exposed – before the modern era, the Italian currency was at least as successful as the German, even excluding Germany’s hyperinflation in 1923 and currency reform of 1948.

The book also highlights the arguments between North and South in the 1990s during the run‑up to monetary union.  At the heart of them was the northern experience of a low‑inflation, hard currency economic policy, while southern states had traditionally tolerated higher inflation and offset it with devaluations to restore competitiveness.  Neither was happy with this state of affairs – the northern Europeans disliked being under-cut and continually devalued against, while southern Europeans disliked the high interest rates which were a natural consequence of their weak currencies.  So there was much support for monetary union from both sides.

But when, and who should be invited to be part of it?  Northern states emphasised the need for economic convergence first, with membership of EMU (and its hard currency and low interest rates) as a prize for those whose economies had already converged, while southern states emphasised the need for political convergence first, with membership of EMU (and its hard currency and low interest rates) necessary to enable weaker economies to achieve parity.

Not for the first time in the EU’s history, politics (which in this instance meant the cause of the southern states) trumped economics, and as a result EMU started with a large membership.  Including Italy.

For the first 10 years of EMU, the financial world was calm and the ECB, bolstered by its location in Frankfurt and its German-style founding laws, gave a very good impression of being Bundesbank mark 2.  As the book makes clear, anyone writing in 2008 would have concluded that rules-based central banking had won the day.

But as the authors explain in detail, ever since then the more pragmatic, more discretionary, dare one say more Italian side of the ECB has been more in evidence, as the central bank has responded to the Euro crisis, the Greek crisis and most recently the pandemic.  Its remit has widened and its willingness to try the unorthodox has expanded concomitantly, to the point where rather than being known for always following precedent and the rules, the single phrase most associated with the ECB in the last 10 years is “whatever it takes”.

And this leads to the forward-looking part of the book, and here I have to say the various essays are perhaps less strong or convincing.  The question of whether the ECB can be “largely rules-based but with discretion in crises” – that is, Germanic when it can, Italian when it must – is not resolved.  Some essays suggest that such an approach risks undermining the rules too much, that once rules are broken, even if in a good cause and with good effect, they are permanently damaged and weakened.

Other essays lead the reader to think about deeper issues, such as what the monetary union really is, and why member states belong to it.  If it is a true union, strongly supported by all and with a commonality of purpose and interest (and an implied willingness to help its weaker members), then it will be strong enough to survive rules being bent and indeed broken from time to time when circumstances make that necessary.  But the alternative is a marriage of convenience between member states who stay together because it is familiar and easier than breaking up, but who guard their own interests and count their debits and credits to each other.  For such a union, and for such members, every breach of the rules reduces their faith in the project and their feeling for their fellow members – a bleak outlook indeed.

But that is perhaps a metaphor for the EU as a whole, and quite definitely a bigger question than this collection of essays, excellent and learned though they are, is prepared to address.  Instead, the authors have collectively stuck to their brief, and one is left after reading them agreeing with the editors that “there is considerable overlap of views north and south of the Alps”, and that “… crossing the Alps is not always easy, but is possible”.


[1]           Edited by Christiane Liermann Traniello, Thomas Mayer, Francesco Papadia and Matteo Scotto.  See