The starting point for the creation of a currency union is establishing the requirements for it to work – in other words, the circumstances under which it makes sense for countries to undergo the complicated process of abandoning their national currency to create and share a common one. Intuitively, adopting a single currency makes sense when doing so improves the efficiency and functioning of national economies and, more importantly, offers increased resilience to external shocks, compared to going it alone.

A number of economic arguments make the case for adopting a single currency. Among the most important are the elimination of exchangerate risk and transaction costs, the convergence of prices, increased trade and investment, lower interest rates and macroeconomic stability. However, the litmus test has been the resilience to shocks: can an economy in a system of fixed exchange rates deal with economic shocks as well as, or better, than one operating under floating exchange rates? To answer this question and judge when circumstances are propitious for a common currency to succeed, most economists turn to Mundell’s “optimal currency area” theory (Mundell 1961).

The optimal currency area that wasn’t

For an “optimal currency area” to exist, the theory requires certain conditions to be present. The first is free movement of people; in cases of economic shocks, workers should be able to move from high-to low-unemployment areas. The second is capital mobility and flexible wages and prices; resources (both money and goods) should be able to flow freely from areas and activities where they are least to where they are most productive. The third is sufficient economic integration so that the economic cycles of countries in the common currency area are pretty much synchronized. The fourth condition is some kind of a risk-sharing system that makes fiscal transfers possible when needed to cushion the cost of an economic shock.

At the inception of the euro, many critics pointed out that the eurozone did not, in fact, satisfy Mundell’s requirements. Of the four conditions above, it could be argued that the first, labour mobility, while theoretically part of the framework as established in the Treaty for the EU, was in practice limited, for both cultural and historical reasons.

The unintended consequences of “whatever it takes”

The European Central Bank certainly did “whatever it takes” to preserve the euro during Mario Draghi’s presidency. “Whatever it takes” is often interpreted as equivalent to the Outright Monetary Transactions programme, announced soon after Draghi’s London speech of 26 July 2012, to address markets’ fear of the breakup of the euro, which the ECB considered unfounded. The reality, however, is that the OMT, despite its high profile and the calming impact its announcement had on markets, was never used. Perhaps it was never needed, because it was only one of many measures introduced after the onset of the crisis to save the euro. Others included a range of Eurosystem actions targeted at addressing market liquidity, including the relaxation of collateral rules, the provision of emergency liquidity assistance by national central banks and the introduction of non-standard measures aimed at redenomination fears and the subsequent risk of deflation. In addition, the ECB played an active part in the creation of the first two pillars of the banking union – the Single Supervisory Mechanism and the Single Resolution Mechanism.

Although Draghi is widely credited with “whatever it takes” – and there is no doubt that it was he who coined that term in his famous London speech – the policy of doing everything possible to save the euro actually started under the presidency of Jean-Claude Trichet, albeit more opaquely, with the introduction of the Securities Market Programme (SMP) in May 2010. The programme involved buying sovereign bonds of crisis-stricken countries – Greece, Ireland, Portugal, Spain and Italy – in secondary markets. The SMP was successful in terms of reassuring markets and reducing yields but was highly controversial, not least because it was lacking in transparency; the ECB never announced details of the amounts purchased nor the targeted securities when the programme was active. It was also widely seen as uncomfortably close to breaching the monetary financing prohibition, as it eased pressure on governments to reduce deficits. Criticism of the SMP by former ECB chief economist Otmar Issing goes even further: he suggests that the ECB was breaching its own independence by helping to bail out countries such as Greece, Ireland and Portugal (Issing 2018).

From financing wars to inflation targeting: a brief history of central banks

Central banks are institutions that issue currency, provide banking services to governments and commercial banks and have responsibility over monetary policy, including setting short-term policy rates (at which they provide short-term liquidity to commercial banks through monetary operations). Often central banks have responsibilities relating to financial stability, which sometimes include regulating and supervising commercial banks and, more recently, resolving banks that are failing.

Central bank legal frameworks vary considerably from country to country, largely reflecting differences in attitudes shaped by diverse historical experiences. A key feature of the European Central Bank (ECB), unlike the United Kingdom’s Bank of England (BoE) and the United States’ Federal Reserve (the Fed), is that it is explicitly prohibited by the Treaty on the Functioning of the European Union (Article 123 – known as the monetary financing prohibition) from financing government deficits. Moreover, although all three central banks have mandates in which price stability is central, price stability is the ECB’s overarching objective: it can support other goals, including financial stability, growth and employment, only to the extent that they do not interfere with price stability. By contrast, the Fed has a dual mandate set in law: it aims to maximize employment and stabilize prices (as well as moderate long-term interest rates). The Bank of England’s objectives are set annually by the government, however. Ever since the bank was granted operational independence, in 1997, the main aim of monetary policy has been the achievement of low and stable inflation; other government objectives, including employment and growth, have been subordinated to price stability – very much like the ECB. Nevertheless, although, in the BoE case, the mandate can be changed by the government in any given year, the ECB’s mandate cannot change without a revision in the TFEU; such a change requires unanimous agreement by all EU member states.

The Swedish Riksbank was the first institution recognized as a central bank. It was established in 1668 as a joint-stock bank, and chartered to lend funds to the government and to act as a clearing house for commerce.

Europe needs a “new narrative” if it is going to move forward rather than falling back into crisis. That narrative cannot be a collection of policy initiatives or institutional reforms. New policies are important; so are new institutional arrangements. But politics and institutions do not by themselves speak to a democratic electorate – and particularly not to an electorate that has focused its attention on legitimate grievances of its own. Only politicians with a clear vision of the future can wield influence with voters in such a context. If the politicians with the best ideas are too afraid to forge a vision, they should not be surprised when voters attach themselves to politicians who run off in the wrong direction. Europeans deserve better political leadership; so does Europe.

But what would such a vision look like? George Papaconstantinou argues that Mario Draghi’s “whatever it takes” moment is a good model for European leadership. This is not an argument for pure boldness or audacity; it is also not a celebration of improvization, although clearly some of that was involved. Instead Papaconstantinou makes it clear that Draghi’s pledge only had the effect on the markets and on the popular imagination that it did because it was well-flanked by sound policies and solid institutional arrangements. Draghi offered a vision alongside his commitment. And that combination of planning and determination is what political leadership is all about.

Drawing on his own experience in politics during the crisis, Papaconstantinou shows how Draghi effectively pushed back against a mistaken diagnosis of Europe’s economic problems. He also shows how these actions fed into creative thinking inside a number of different parts of the Europe Union about how European institutions can be made more resilient. Finally, Papaconstantinou underscores how the agenda for strengthening Europe remains controversial and incomplete. There was no inevitability to the events as they unfolded; instead political leadership helped to shape the new environment – with positive results that could nevertheless come unbound.

The challenge now is to round out the vision of Europe that the resolution of the euro crisis set in motion, building on contributions from both European institutions and the member states.

Europe is facing a challenge to its democratic norms and values. Populism, nationalism and autocratic behaviour are on the rise; liberal democracy and the values of freedom, tolerance and the open society are under threat. For a long time, it was believed that these values were not only entrenched in EU countries, but with Europe’s help they would progressively dominate in the rest of the world as well. Instead, they are retreating even at home.

This is not a phenomenon that can conveniently be laid at the door of the eurozone crisis; it is broader, more complex, global in nature. Its roots are partly economic, a reaction to the displacement and insecurity due to globalization and automation. However, they are also cultural, reflecting fears of a loss of identity and of “losing control” in cosmopolitan societies.

The populist discourse feeds on these fears, anxieties and hardships. Rather than addressing the real causes, it tends to blame the euro, European institutions and bureaucracy, the “elites” and even more broadly the European project as a whole. The answer offered is protectionism, a retreat to the nation-state, closing borders and appealing to a vision of an idealized past that can never be recreated, if it ever existed in the first place. Yet the simplicity of this answer resonates with a part of the electorate, driving electoral fortunes and increasingly shaping the political debate.

How Europe (its people, institutions and policies) respond to this discourse will be critical for its future. It will not be easy – partly because Europe itself is seen as part of the problem, but also because addressing the grievances is an almost impossible task in practice. Populism is a reaction to real, not imaginary, problems, conveniently anchored in the narrative of a self-serving elite versus the man on the street. From migration to the impact of trade on jobs, populists ask some of the right questions. Unfortunately, they either have no answers or provide the wrong ones, couched in an oversimplification or misrepresentation of the facts – and, in the end, when they manage to exercise power, they make matters worse.

Only a few years ago, to suggest Europe was “post-crisis” would have been to border on hubris. Yet Europe today finds itself in a surprising place: after weathering an economic crisis that challenged its core tenets and almost brought down its crowning achievement – the common currency – it now believes that the worst is behind it and looks more confidently again to the future. Guarded optimism seems to be the order of the day. This caution is understandable and even justified, to an extent; after all, it was not that long ago that pundits predicted the end of Europe as we know it. However, the problems that were at the root of the crisis in the first place – in addition to others, which have emerged since – remain largely unresolved and still need to be tackled. The job is by no means done.

It has been more than a decade since the onset of the US financial subprime crisis and its impact on the European continent, and almost ten years since Greece triggered the fully fledged economic and financial eurozone crisis that rattled the whole world. During that time, Europe’s common currency area experienced a rude awakening to the reality of its incomplete, if not deeply flawed, construction.

The EU – in both its political and institutional manifestations – initially delayed and dithered in its response, hoping the matter would resolve itself, or at the very least that it could be contained. It was then forced by events to tear up its own rule book and bail out Greece. Eventually it embarked on a grimly determined, but to-date unfinished, effort to rewrite the rules of the Union’s economic and financial institutional architecture. Financial firewalls were erected, new institutions were put in place and decisions on creating a banking union and a true fiscal union were advanced, all in an effort to safeguard economic and financial stability and avoid a repeat of the kind of problems that threatened the very existence of the euro.

These decisions were taken in an increasingly toxic political environment, with citizens dissatisfied with the inability of governments to deliver prosperity and jobs, and with popular referenda in a number of countries loudly rejecting business-as-usual politics.

It all started on the other side of the Atlantic.

Given the design faults of its construction, a crisis in the eurozone was, with hindsight, just an accident waiting to happen. Many observers place that accident in Greece in early 2010, when the country progressively lost access to international financial markets and eventually had to rely on official support from its eurozone partners and the IMF. The problem, however, had already manifested itself in a different guise earlier in a number of eurozone countries, including in Europe’s “virtuous” North. What is more, the roots of the crisis can be found not in Europe, but on the other side of the Atlantic, in the financial and economic problems caused by the housing bubble and toxic debts of the subprime mortgage market in the US.

The US banking system was characterized by lower capital requirements under the Basel II banking regulatory framework, the deregulation of derivative transactions and “voluntary regulation” programmes reducing capital requirements for the largest banks. This lack of robust regulatory oversight resulted in extensive financial engineering and contributed to the creation of a housing bubble. Housing prices rose sharply as borrowers took advantage of low interest rates and easy lending conditions. Meanwhile, lenders masked the riskiness of their loan portfolios by issuing mortgage-backed securities and by “packaging” risky loans into synthetic financial assets such as collateralized debt obligations (CDOs), which were then rated highly by credit rating agencies. These higher levels of subprime lending, together with speculation on residential housing, drove prices higher and increased the indebtedness of households.

When in 2007 the bubble eventually burst and housing prices collapsed, borrowers with variable rate mortgages found themselves with negative equity, unable to refinance their loans and meet obligations. Mass foreclosures ensued, coupled with a sharp decline in the value of securities backed by housing loan portfolios held by financial institutions. Their financial distress was marked by the collapse and takeover of Bear Sterns in March 2008, the takeover of mortgage corporations Freddie Mac and Fannie May, the bailout of insurance giant AIG and eventually the crisis-defining moment of Lehman Brothers filing for bankruptcy in September 2008.

Within hours of the announcement of my decision to step down from the governor’s post at the Central Bank of Cyprus (CBC) on 10 March 2014, The Economist published an article entitled “A blow against [central bank] independence” (The Economist 2014). The article argued that my resignation set “a worrying precedent in the euro zone”, but went on to qualify this by suggesting that Cyprus might be a special case. Specifically, it referred to the “disastrous events of March 2013” and “Cyprus’s continuing plight”, with Bank of Cyprus, the country’s biggest bank, being in a “dire state”. It also indicated that my resignation had something to do with the blame game after the crisis and the Cypriot central bank’s poor job in supervising the banks, failing to mention that I was appointed only in May 2012 and the crisis was already simmering before I took office. The article correctly stated that my relations with President Nicos Anastasiades, who came to power ten months after I had been appointed by the previous government, “were not just poor but non-existent”. It failed to explain, however, that Anastasiades was surprisingly close to the bankers who caused the crisis. Nonetheless, and notwithstanding the qualification about Cyprus being perhaps a special case, the article concluded that “similar pressures may be exerted elsewhere” that could “undermine the capacity of the ECB [European Central Bank] to act in the interests of the euro zone as a whole”.

It was important to set the record straight. That is largely why I felt compelled to write my first book, soon after I returned to my academic post in the United Kingdom; A Diary of the Euro Crisis in Cyprus: Lessons for Bank Recovery and Resolution (2017) tells the story of the Cyprus crisis from my first day in office (3 May 2012) to the last (10 April 2014). It explains the root causes of the Cypriot crisis, and explains how the country’s banking system doubled in size between 2005 and 2011 to reach 9.5 times the size of the country’s gross domestic product (GDP).

The euro project was supposed to seal the common economic destiny of “core” Europe. Rather than bringing countries closer together, however, the opposite has happened. Since the introduction of the euro, we have witnessed a divergent evolution of eurozone economies – caricatured as the contrast between a virtuous North, which has kept its public finances in check and become more competitive through reforms, versus a “profligate” South, with rising debt and continuously weakening competitiveness.

This divergent evolution is also reflected in figures that act as a proxy for the evolution in living standards: while per-capita GDP has increased since 2000 for the eurozone as a whole (even more so for the entire EU-28), this has not been uniform. Broadly speaking, countries in the North have fared much better than those in the South, as have the new EU entrants after 2013, which were in a catch-up process. In Greece and Italy, real GDP per capita was the same or even slightly lower in 2018 than in 2000 (see Figure 6.1). This divergence has strained relations and fuelled distrust and resentment, at a time when decision-making has shifted from the European Commission to the leaders of the EU’s stronger countries.

A North–South economic gap has long been present in the EU; successive waves of accession countries expanded geographical boundaries but also brought in increasingly divergent economic models and levels of development. To counteract this, the stated aim of greater convergence within the Union gave birth to mechanisms such as those of the EU structural funds, aimed at building infrastructure or capacities more generally in the weaker economies. These have helped close some of the economic gap. They did so in the context of differentiated economic strategies in the “laggard states”, with some countries more effective at economic catch-up than others.

The eurozone crisis, however, has made internal divisions more evident by re-opening the economic gap. All countries felt the brunt of the 2007–9 global financial crisis, but there are striking differences both in terms of the path into the eurozone sovereign debt crisis after 2009 as well as in terms of how countries came out of it.

The historic high cost of personal vehicles led to the growth of demand for new shared modes of travel at much lower cost, in the form of mass-market public transport: trains in the nineteenth century, buses in the first half and air travel in the second half of the twentieth century. The heyday of public transport was reached in the middle of the last century. Subsequently, there was a very substantial shift to personal means of transport as the auto makers drove down costs through efficient assembly line technology, to the point where the car is now the main mode of travel in developed economies.

Yet public transport is far from being down and out. These traditional shared modes of travel are far more efficient at moving people in their use of road and rail infrastructure. The capacity of the road network constrains car use. Rail in all its forms has undergone a major revival in Britain and elsewhere, largely because it offers fast and reliable journeys compared with cars and buses on congested roads. In contrast, the situation of buses is far more variable and depends on local circumstances. Long-term decline in passenger numbers is common. Yet in some cities passenger numbers are growing, aided by policies that prioritize buses over cars.

The main question to be considered here is the likely impact on public transport modes of the new digital technologies that I discussed in the previous chapters. I will also review technological possibilities for extending the realm of public transport, above and below congested surface networks.

Digital railway

Digital technologies are having a profound effect on the railways, both in how we interact as consumers and the way in which trains are operated and managed. The convenience of making arrangements through well-designed websites has contributed to the growth of longer-distance rail travel, eliminating the need for intermediation by travel agents. The ability to flex fares and offer choices to passengers helps contain costs by matching demand with supply to gain revenue from seats that might otherwise remain empty, although often prompting criticism of an over-complex fare structure.

Our modern transport system has developed over the past 200 years. Enormous investment in infrastructure has changed the landscape, both the roads and railways themselves, and the growth of towns and cities they made possible. All these structures have long lives, and most of the corridors are effectively permanent. The transport system and the travel it permits have shaped our lives and enlarged our horizons.

Yet potentially substantial changes are underway in why and how we travel. These began at the end of the twentieth century and are destined to continue. We are seeing important developments in attitudes towards the car; in size, age and location of populations; and in new technologies, both transport and wider digital. So the future of travel and transport could be very different from the past.

I start Part 1 with a review of the transport system as it is at present and the travel behaviour that has resulted from it. I then discuss how the present situation has developed. The focus of the analysis will be on travel and transport in Britain, both because its travel and transport statistics are world-leading in scope and extent, and because interpretation of such data requires a deep understanding of the societal context, which is most readily gained by residence. The book will also address what is happening in other high-income countries, particularly in Europe and North America, and will note some developments elsewhere, mainly in China. While there are significant differences between countries as regards demography and governance, there are many underlying similarities in respect of travel behaviour and the influence of new technologies.