Interview: Prof. Ashoka Mody, Princeton University

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Ashoka Mody is Charles and Marie Robertson visiting professor in International Economic Policy at the Woodrow Wilson School, Princeton University.


The year is 2019: Euro is now 20 years old. How well is the eurozone prepared for possible future crisis or recession, while the key interest rate is virtually zero percent?

The eurozone is financially more vulnerable than at the start of the Global Financial Crisis (GFC) in 2007. Government debt ratios are higher nearly everywhere—in some cases, significantly higher.

Although banks are in better health than at the peak of the eurozone crisis, several banks are still very shaky. The largest of the troubled banks is Deutsche Bank, and Italy's Banca Carige is teetering.

Very likely, "zombie lending," refreshing of loans to companies under financial stress, is hiding the extent of the problems. With the world economy slowing down, the stresses will become more acute and visible.

While the vulnerabilities are greater than in 2007, the policy space to deal with a new crisis is much less. The ECB’s policy interest rate is negative and cannot go much lower without creating more pressure on earnings of banks and insurance companies.

The ECB has stopped its bond purchases, despite the evident economic slowdown. Stopping of bond purchases reflects the ECB’s political limits: its holdings of the debt of member countries is already in the region of 20 percent—the willingness to expose the ECB to greater sovereign risk is limited.



Hence, I expect that the ECB will be very reluctant to restart bond purchases. On fiscal options, while the budget deficits are much lower, the debt ratios are high in most countries. Hence, forceful stimulus will be limited. In any case, the eurozone remains ideologically opposed to fiscal stimulus.

So, while there is much celebration that the euro has survived, survival is not an indication that the prognosis has improved. In addition to the financial vulnerabilities, potential growth rates have declined. Hence, with each successive crisis, the eurozone’s resilience will diminish.

How is it possible that European decision-makers have agreed to have a balanced budget in the EMU in the first place, while there is no balanced budget in any of the major economic regions (US, Japan and China)?

The eurozone was an economically illogical construction, as everyone understood. A single monetary policy will always be one-size-that-fits none.

The political willingness to create a true fiscal union, embedded in a political union with a finance minister who is accountable to the peoples of Europe will never happen.

Hence, eurozone policymakers and enthusiasts believe that the steps taken during the crisis—and others in the works—will be sufficient to hold the eurozone through future crises.

Central to the premise that the eurozone can survive without a politically legitimate fiscal union is the belief that fiscal austerity is always a good thing.

As I describe in the book, and as I recently elaborated during the tussle between Rome and Brussels on Italy’s fiscal stance, austerity has become part of the eurozone’s identity. Some commentators believe that eurozone authorities will learn from the harm done by austerity. I doubt it. Fiscal austerity is a necessary element of the eurozone contract.

It reflects a deeply held conviction that austerity compensates for the deficiencies of the eurozone construction. As former Italian prime minister Mario Monti said, Germany has won Europe’s economic debate.

Berlin’s “precious” vision of fiscal discipline, Monti genuflected, has been “marvellously exported.” 

What is your take on the explanatory approach that a huge gap in competitiveness among the member states has arisen due to German wage-dumping policy? 

If I’m not mistaken, you don’t tackle the issue in your well-regarded new book, even though you underline the issue of losing competitiveness in Southern Europe?

I discuss the growing North-South gap in the eurozone in my chapter 9, in which I describe Europe as a declining and divided continent. All eurozone nations are—to greater of lesser extent—losing in the global competitive race to more dynamic countries.

This is because eurozone countries have not kept pace with investments in education and technology, which is the essential lubricant for successfully competing in the international marketplace.

The North-South gap arises, not because of Germany’s so-called wage dumping (which I do not discuss because I believe it is a sideshow), but because the southern countries are technologically much further behind the northern (which, remember, are themselves lagging international leaders).

This north-south differential is again visible in the gaps in education and R&D. But behind these gaps lie institutional weaknesses, which manifest themselves in some combination of larger shadow economies, more corruption, and less effective governments.

The institutional weaknesses of the south are long-standing. Remedying them will take a generation and that only if there is serious political understanding and willingness to undertake the change.

Coincidentally, southern countries (other than France) are also aging faster than the northern countries. This combination of technology and demographics will determine the southern member states’ potential growth rates.

As long as the potential growth differences between the north and the south remain significant—and possibly increase—a single monetary policy will remain a handicap for the south for which there exists no compensatory mechanisms.


Thank you very much.



Ashoka Mody is Charles and Marie Robertson visiting professor in International Economic Policy at the Woodrow Wilson School, Princeton University.

Previously, he was Deputy Director in the International Monetary Fund’s Research and European Departments. He also worked at the World Bank, University of Pennsylvania, and AT&T’s Bell Laboratories.

Prof. Ashoka Mody’s current book “Euro Tragedy – A Drama in Nine Acts” is published by Oxford University Press, 2018.