Exactly ten years after we entered office as members of the Barroso II Commission, and were immediately confronted with the Greek debt crisis, my former colleague, Olli Rehn, has come forward with his memoir under the metaphoric title: Walking the Highwire. The existential crisis of the single currency, which he had to solve during his mandate, was and remains a subject of enormous academic and political interest. And Olli was not an eyewitness to the process, but one of the drivers.
Make no mistake, Olli Rehn was an absolutely central figure in the EU crisis response between 2010-4, followed by periods he spent as a Member of the European Parliament, government minister, and finally central bank governor in Finland. And the fact that in 2019 he entered the race for the IMF Managing Director position demonstrates that he also is considered to be among top economic policymakers of the world.
A decade after the beginning of the story, and six years after leaving office, one must be aware of the vast literature accumulated about the Great Recession and the euro area financial crisis, which also includes tons of criticism of the EMU as a structure as well as the policymakers in charge at the time of this mega-crisis. As once in office, Olli also as an author takes his critics with serenity. He quotes many of them (Varoufakis, Fukuyama, Sandbu, etc.) in the book, and responds tenderly. In this genre, it is not the specific paragraphs but the book as a whole that is supposed to provide the answer.
A Finnish man in Brussels
In an early chapter of the book, and also subsequently on many pages, we are reminded that the author is a Finnish economist and politician. Highlighting the home country helps embed the process of high economic governance in the real life of the policymaker, who is deeply engaged in European and world affairs, representing the entire community on a daily basis, but also often touching the green, green grass of home. As a result, the book is littered with nice little episodes, for example when we learn about the coinciding visits of Bruce Springsteen and Mario Monti in Helsinki. Smaller Finnish places like Mikkeli and Pori also feature strongly in various chapters. And Finland comes up in a dinner conversation with Janet Yellen as well (p. 204), since the former Fed chair spent some weeks in Olli’s home country in the 1970s.
This is a significant background factor, since Finland only joined the European Union in 1995, and remains a land of strong EU-sceptic tendencies. In the 1980s and 1990s, Olli Rehn, as a young liberal activist, played a role in the pro-EU movement, and ended up as head of cabinet of the first Finnish EU Commissioner, Erkki Liikanen. This connection remained important for his career, even if Liikanen was a Social Democrat. In 2012, Liikanen chaired a group of experts set up by the European Commission to consider EU banking sector reforms. And in 2018 Olli succeeded his mentor once more as governor of the central bank of Finland.
The frequent mentioning of the Finnish background is not only a gesture, but provides various references regarding the policy debate and analysis. It can also be source of some irony. Crucially for our story, in 2011, the Commission was under huge pressure to increase its profile as a fiscal authority, and be able to discipline member states, which was often expressed by calling the Commissioner responsible for macroeconomic governance and the euro a “tsar”. Olli, as everyone else, found it ironic that a Finnish liberal politician is addressed as a tsar. Whatever language you prefer, he was indeed a powerful player in those years when fiscal discipline appeared to be the main unifying principle of the European Union.
Since this book is an account of the euro area crisis by one of the most central individuals in the story, perhaps the greatest added value of the volume is the micro-perspective of policymaking, which in this case simply means continuous crisis management. And because the text is written from a micro-perspective, facts are not stylised, but very concrete. If you are too young, or were not there for either of the episodes, from this book you will learn who was involved and when and in what way during this very turbulent chapter of EU history. Which names and institutions appear in the book must have been carefully selected, and the end result is a huge but manageable amount of detail.
In Olli’s company, we meet a long list of finance ministers, central bankers, occasionally prime ministers and leaders of multilateral organisations. It is more than a gesture to former colleagues that Olli does not forget to mention his cabinet members and DG ECFIN colleagues, starting with Marco Buti but also many others, who otherwise would remain “faceless bureaucrats”, but who on these pages receive their appropriate characterisation as masterminds, negotiators and enforcers. Obviously, they do not appear as torturers of Greece and other peripheral countries, but as engineers of European solidarity in exchange of reforms that eventually bring the clients to a brighter future.
The institutional strengthening of DG ECFIN (Directorate General for Economic and Financial Affairs) was a major development in the crisis period, symbolised by moving into the Charlemagne building, right next to Berlaymont. To satisfy voices that demanded a reinforcement of governance, and especially the enforcement of tough fiscal rules, Olli’s title was extended: he also became Commissioner for the Euro in October 2011, and at the same time Vice-President of the Commission half-way through the euro area crisis.
Please note what is actually missing from this tableau: the European Commission as a body, or the College of Commissioners as a decision-making organ. Yours truly is one of the few colleagues of Olli who is mentioned (once) in the book, but the majority are not, and there is very little sign of collective decision making and responsibility. And this is not an omission in the book, this is how many of us felt at the time – DG ECFIN becoming the empire of its own, and Olli operating as the lone wolf occasionally briefing the College, after arriving late, and before leaving early. President Barroso, of course, is mentioned on many pages, and Olli once describes him as “competent” (this book does not seem to be the most suitable one to add subtlety to such qualifications).
The importance of identifying players as opposed to dealing with issues is exposed by the name index and the subject index at the end of the book, and the “imbalance” between the two. While the former is rather detailed, the latter is unusually rudimentary. Practically, the subject index is limited to some countries and institutions. If you are interested in mentions of the European Semester, the gender quota, or even the MIP (Macroeconomic Imbalances Procedure), you cannot rely on it.
Austerity and structural reforms
In the wide public debate, and much of the academic literature, this period of euro area drama and ECFIN supremacy is associated with one central concept: austerity. If there is a general, or a kind of wholesale, criticism about the handling of the euro area crisis, it is about this. However, the difficulty with this debate is that various authors define austerity differently, and those who are accused of overdoing it do not use the word at all. Olli does not advocate austerity in this memoir either, as in his time as Commissioner the policymakers saw themselves as pursuing front-loaded fiscal consolidation (especially in 2010-11), confidence-building measures, together with growth- and competitiveness-enhancing reforms.
The EU crisis response to the euro area crisis, at least in the 2010-12 period, is characterised by the dual strategy based on fiscal consolidation and structural reform. While many commentators simply call this an austerity period, Olli works hard to prove that for him it was always structural reform that was more important. This simple formula was sometimes hard to explain to the rest of the world, including the professional media. The book refers to an episode when the Financial Times actually changed the title of Olli’s original article against his will, giving the impression that he was preaching austerity when the article was about the importance of structural reform.
What was difficult at the time remains difficult ex post too, and for the author of the book this is the dilemma of subjectivity and objectivity. If we are driven by former first, we have full right to express what we think and what we were thinking. However, on this very issue, it was not only a misperception that austerity was the dominant doctrine, and only pushed back after the Summer of 2012, which Olli convincingly describes as a watershed. The fact that Olli was not a single minded austerian (contrary to accusations by Krugman, etc.) should not hide the fact that in the 2010-12 period the OHIO (own house in order) dogma, a form of fiscal orthodoxy, did prevail. From this point of view, Olli’s book is not too helpful, since for example the 2011 December Fiscal Compact is barely more than a footnote. It might be true that some officials among themselves talked about a CCR (comprehensive crisis response) already in 2010, but 2012 was a U-turn exactly because until that point (the Four President’s Report and the London revelation of Mario Draghi), the vision of a systemic EMU reform was not the dominant strategy for the bunch of institutions responsible for handling the crisis.
Downplaying the objective importance of pro-cyclical fiscal policy is a strong theme in the book, so much so that even the Troika (the ad hoc format for creditor rule vis a vis insolvent euro area countries with the participation of the European Commission, the ECB and the IMF) appears as a tool of solidarity. When it comes to the Irish scene and a hostile national politician of another country mentioning the ultra-low Irish corporate tax, Olli opines that we are not supposed to kick the friend lying on the ground. One may wonder why the same morality was not applied to Greece. Much needs to be done to deepen our understanding of the austerity experience and for example ho the alleged trade-off between austerity and structural reform functioned.
The originally heavily misdiagnosed Greek crisis to some extent framed the five years of the second Barroso Commission, and is also a major theme in Olli’s memoir. With reference to (former Greek finance minister) George Papaconstantinou, he highlights that Greece paid dearly for not having a bipartisan agreement on the bailout programme (p. 66). But is this really true? Losing a quarter of Greek GDP had nothing to do with not having a bipartisan agreement. And the fact that Pasok (Greece’s main Social Democratic party) was almost completely consumed by the long crisis is not that unique. The Irish Labour Party was also destroyed, despite joining a grand coalition. In Italy, despite cross-party backing for the austerity government of Mario Monti, both the PD and Berlusconi’s party suffered set-back,s and the populist Five Star and Salvini’s post-fascist League together came to power in 2018.
The centrality of rebalancing
What Olli considers to be the most essential challenge of his second mandate as Commissioner, and perhaps also as the most important message of the book, was that the EU economy, or more precisely the euro area, had to be rebalanced at the time of the euro area crisis. That is why the word appears in the sub-title of the book. This job was not finished when Olli left office, and it has not been finished since. Indeed, the tool to address imbalances in the EU could have been Olli’s main achievement. It is called the Macroeconomic Imbalances Procedure (or MIP), and it had already been invented in 2010, but the problem was that it did not function very well, and very few took note of the effort to go beyond short-term fiscal equilibrium outside the Brussels bubble. It was more an issue of throughput rather than output.
Rehn presents evidence of his interventions and statements regarding euro area rebalancing. However, the question is to what extent this became a top issue for EU policy. And the answer is that while the MIP was on stage from 2010 onwards, like a Chekhovian gun, using it for current account rebalancing only started (and even then very timidly) when the 2014 Annual Growth Survey was presented in November 2013. With robust economic governance through the European Semester (introduced in 2011), the EU became really intrusive. But the country-specific recommendations which come with the Semester were indeed country-specific. Although there were also recommendations for the euro area as a whole, everybody focused on the CSRs, and very few adopted the approach of seeing the EMU as a macroeconomic unit.
The weakness of the MIP, or at least the narrow focus of its application, is revealed by Olli when he refers to a chart used by Jean-Claud Trichet in 2011 and calls it his favourite (p. 239). That chart pointed to unit labour cost as a central driver of imbalances and, if adjusted, the source of competitiveness – a very narrowly focused interpretation of competitiveness, indeed, but it helps explain to the reader how we ended up with internal devaluation as a key component of the ‘muddling through’ strategy and ignore what macroeconomists call the fallacy of composition.
More important than North-South, the most pivotal imbalance politically is the imbalance one might detect between France and Germany. And despite it being Germany that holds back wages artificially for ten years behind the rise of productivity, and maintains a current account surplus that is the second man-made object visible from the Moon after the Great Wall of China, it is still France that is referred to as a source of imbalance, and not Germany. Perhaps the most ironic episode in the whole book, therefore, is Olli’s encounter with French finance minister Pierre Moscovici, who later became his successor. First, when Olli is the Commissioner, Pierre has to ask for leniency while Olli has to represent rigour. But a few years later, when Olli is a minister, he comes to Brussels to seek leniency, and who else sits in his former chair but Pierre. Luckily, as soon as we left office, a new regime was installed with a more flexible interpretation of the fiscal rules.
The problem of imbalances returns at the end of the book, when Olli elaborates on the state of economics, or as it is often referred to, the ‘dismal science’. Indeed, following the chronicle, the last part of the volume elaborates on more general, theoretical issues, which makes this memoir even more atypical. And in this chapter Olli proves even more that he is not the narrow-minded neoliberal that some critics stereotyped him as. In fact, he describes himself as a late-born Minskyite, alongside references to Keynes and engagement with several contemporary public economists such as Olivier Blanchard, Willem Buiter, and Paul de Grauwe.
Europe beyond the euro
However, the European economy is not only imbalanced in one way. Apart from the core–periphery asymmetry inside the euro area, there is also an East–West divide, which apparently is not interpreted as a significant issue for the economy and finance portfolio in the Commission. If anyone, it is the Commissioner for regional development who has to take care of it. Neither Poland nor Romania appears in the subject index, and in the name index we should not look for either Jacek Rostowski or György Matolcsy (even Groucho Marx is mentioned once, and Don Camillo three times). Those who think that Eastern underdevelopment is some kind of distinct problem from the governance of the euro should think again. For example, so far the only country for which an actual fine was proposed for violating the fiscal rules of the EMU is Hungary, a non-euro area country. Compared to that, the treatment of this episode in the book is rather abrupt (p. 160).
On the other hand, Olli devotes a short chapter to the question of EU–UK relations, since the discussed period is also the one when the anti-EU drift of the UK started to escalate, and eventually produced the 2016 referendum with its well-known result. Discussing Brexit is a very good idea, and creates expectations. However, expressing affection for Britain (with special mention of Manchester United) and claiming that the UK’s drift towards the exit and the euro area crisis was just a coincidence is not convincing. First, it should be highlighted that ever since Maastricht (and its preparations), the idea of monetary union had pushed a wedge between the continental countries and the UK. Second, at the time of the euro area crisis, anti-EU forces were provided with two crucial arguments. The euro area recession (when the US economy was already experiencing GDP and job growth), together with the chaotic crisis management, did not make the EU more attractive to the British, to put it mildly. And very importantly, the cross-border labour flows generated more immigration to the UK, which had already been agonising with this question and did not want to become an employer of last resort.
It is not only because of geography that the reader may note with regret that this memoir is predominantly restricted to questions of the euro and the euro area. During the five years discussed, Olli was part of a Commission with over two dozen portfolios, and took a position on many issues beyond his own field. Certainly, it would be unrealistic to expect him to cover a wide range of issues in detail, but a few key issues connected with economics or finance would have added value. For example, creating the 2014-20 Multiannual Financial Framework of the EU (in 2011-3) should be a matter of interest, together with the pursuit of EIB-issued “project bonds”, which eventually paved the way for the “Juncker Plan”.
Similarly, the Europe 2020 Strategy (for smart, sustainable and inclusive growth) also fails to pop up in the book, despite the fact that it was the flagship long-term development plan of the EU, discussed in our very first College retreat in Bruges, endorsed by the European Council in June 2010, and framing the MFF and much of the European Semester. Unintentionally or not, the omission of the Europe 2020 Strategy does have a meaning. By forgetting about the EU’s 10-year-long strategy, which was the second one in this profile after the Lisbon Strategy adopted in 2020, we have a European Union that cannot really plan long-term, and perhaps should not even be interested in doing so.
The mission barely goes beyond survival, constrained by the Treaties, the institutional, geopolitical and ideological fragmentation of Europe. In the period covered by the book, it was muddling through that was possible, and we should not expect much more in the future either. This is also why the past should not be seen too negatively, and the future should not be seen too pessimistically. And this is the idea reinforced by the motto of the book, the Eastern Finnish proverb that “muddling through can prevent you from tumbling down”.
On the other hand, the last part of the book (the one on the state of economics) could be a starting point of a more comprehensive elaboration on the economics of the European Union, with the functioning of the EMU in the focus. It also provides us with some insight about what Olli might think as a central bank governor in Finland during the coronavirus crisis, when Europe is hit again by an unprecedented crisis, and reforms that had been seen as just marginally possible are brought to the centre of the political debate.
Football almost everywhere
Having missed out on IMF leadership (as it is well-known, one of our former colleagues, Kristalina Georgieva, was elected), in August 2020 Olli was confirmed as COVID-19 steering committee chairman by FIFA (the world football federation). This should be no surprise to those who have read the book, in which football is one of the main background themes and source of metaphors. For anyone for whom football was a main part of their childhood activity and upbringing, this is absolutely natural.
For example, Olli draws a parallel between the Dutch planning system designed by Jan Tinbergen and the “total football” invented by Johan Cruyff. In a small coordination meeting with finance chiefs in February 2010, Wolfgang Schauble “played libero” (p. 55). When it comes to France, besides the giants of EU governance (Delors, Lamy, Barnier, Lagarde, Moscovici) Olli inserts a reference to Michel Platini, combining admiration with regret. We even learn that he once actually received a “hairdryer talk a la Sir Alex Ferguson” from the head of the ECB, Trichet.
The Greek rescue package in 2010 was not delivered at the 11th hour, but “in injury time”. This was, by the way, a favourite metaphor for Olli, who also at the end of 2013 insisted that the Commission has to remain focused on its tasks until the last day in office, since top teams (the list of which would start with Manchester United) score many of their winning goals in injury time. In comparison, he did not wait until the end of Barroso II, but took advantage of the transfer season and signed up for the European Parliament at the Spring 2014 elections.
During his time in office and writing the memoir, Olli not only used the language of football, but also played. It turns out that on a Sunday in November, it is during the break in a football match at Park Cinquantenaire in Brussels that he receives a call from Trichet to discuss details of the Irish intervention of the Troika. Some of these diary-like details might be too much for the ordinary reader. One important fact, nevertheless, is missing: the result of the match in May 2011 between the Andor cabinet and the Rehn cabinet at rue Volta, Ixelles.