Following the 2009 Great Recession, the EMU has experienced modest growth overall. The annual growth rate of GDP from 2010 – the first year of the recovery – to 2019 averaged 1.36 per cent. In 2012 and 2013 growth was negative and in 2019, before the outbreak of the Covid-19 crisis, it was only 1.2 per cent (Eurostat 2020). Figure 7.1 shows that the EMU countries performed differently. Italy's economy, for example, remained in stagnation and Greece has far from overcome the effects of the sovereign debt crisis of 2010. In 2019, ECB refinancing rates were still at zero and it had restarted its monthly net interventions to buy public and private bonds. There were already clear signs of an economic downturn in the second half of 2019, although the extent of this was not yet clear. The Covid-19 crisis, which came to a head in early 2020, was consequently untimely for Europe.

Despite all the uncertainty of forecasts, it is clear that the Covid-19 recession will be profound. The ECo (2020b) expects EMU GDP to shrink by 7.7 per cent in 2020: 6.5 per cent in Germany, 8.2 per cent in France, 9.4 per cent in Spain, 9.5 per cent in Italy and 9.7 per cent in Greece. This economic slump will be the most severe Europe has experienced since the Second World War. As in the Great Depression of the early 1930s, fundamental economic and political changes cannot be ruled out. In early summer 2020, as we write this chapter, economic development in the immediate future remains extremely uncertain.

The immediate reaction of EMU member states to the Covid-19 crisis demonstrated yet again how uncoordinated the EU still is in the face of threat. At the outbreak of the pandemic, each country tried to navigate the emerging problems alone. Some countries, such as Austria, initially ignored the health hazards, only then to close its borders to neighbouring countries without consultation. Other countries quickly followed suit. In addition, each country adopted its own health protective measures, such as differently targeted travel bans, specific shutdowns for schools and restaurants or curfews or social distancing rules. The ECo was demonstrably too weak to play a coordinating role.

With the creation of the European Monetary Union (EMU) in 1999, the participating member states took a bold step towards further economic and political integration. The development followed the logic of European integration since the Second World War – start with economic integration and political integration will follow. However, the creation of a monetary union implies that member states are giving up national sovereignty and establishing supranational institutions. At the very least a supranational central bank is needed to manage the EMU's monetary policy.

The preparation for the implementation of monetary union was far from complete. The European Central Bank (ECB) was created but other powerful supranational institutions in the EMU were missing. A vacuum developed with insufficient institutions in the EMU to manage its macroeconomic development while reducing room for manoeuvre for macroeconomic policy at the national level. The history of EMU is a history of the ECB struggling with the incompleteness of the monetary union. Cooperation among states could have reduced the lack of institutions in the EMU. However, cooperation was insufficient and became interwoven with the struggle of different member countries to increase or defend their influence and enforce their own economic policy strategy. Germany as the biggest country in the EMU followed hegemonic ambitions. However, its power and willingness to stabilize the whole monetary union was incomplete.

With this in mind, we analyse the history of the EMU and especially the policy and role of the ECB in the framework of macroeconomic management. The first draft of the book was finished in early 2020, just as the Covid-19 crisis hit Europe. We then added Chapter 13 to provide some analysis of the early response to the crisis – as far as this is possible in June 2020.

We would like to thank Alison Howson for support and debates and for her encouragement to write this book. We also thank an anonymous reviewer for helpful comments. Last but not least, we thank Lukas Handley for his technical support.

Economic policy in the EMU during the Great Financial Crisis and the Great Recession were comparable with developments in other countries, for example the United States. But the further development in the EMU is very specific. It reflects the lack of central institutions in the EMU and the inability to find joint reactions to fight the crisis in the interest of the whole EMU. The fragility increased to such an extent that in 2012 there was the danger that the euro area would fall apart.

No comprehensive lender of last resort for public households

Fresh adversity emerged in Europe at the end of 2009. Even during the upswing before the Great Recession, Greece had high budget deficits and a high national debt. In 2009, Greece's budget deficit increased to almost 15 per cent and its public debt to around 130 per cent of GDP. From the end of 2009, doubts also arose about the accuracy of the statistical figures provided by Greece.

Greece was only the tip of the iceberg, and other countries, especially Spain, Portugal and Ireland, were increasingly caught in a crisis maelstrom. These countries had demonstrated sound fiscal policy before the Great Recession, Spain and Ireland had even realized budget surpluses. The problem was a different one. The no-bail-out clause of the Maastricht Treaty hung like the sword of Damocles over the countries. They could not expect help from other EMU countries in case of financing problems of public households, and the ECB was strictly forbidden to help public households. In a self-fulfilling prophecy, doubts in financial markets as to whether public debt could be serviced led to liquidity problems in some of the member states of the EMU.

Consequently, interest rates for credit to public households with potential finance problems started to escalate (see Figure 7.2). It was only a matter of time before governments themselves would become illiquid. They were indebted in their own currency, but the design of the EMU made them look as if they were indebted in foreign currency. In fact, they no longer had their own central bank, which in any normal nation state could have acted as lender of last resort through direct credit or indirectly through purchases of government securities on secondary markets.

The writing of this book has been caught up in the rapid changes in Hong Kong's politics. The first edition was almost complete and ready to go to press in June 2019 when major protests erupted in Hong Kong. Thanks to the nimble work of Agenda Publishing, I was able to add a short Afterword to the first edition, covering events up to 17 June 2019, including the two most substantial and largely-peaceful protests on 9 and 16 June, as well as more violent scenes on 12 June. At the time, it looked as if the government's announcement on 15 June that it was suspending the extradition bill which was the catalyst for the protests meant that things might subside before too long. However, the protesters had the wind in their sails, and the events of mid-June turned out to be just the beginning of a long, hot summer and autumn of unrest in Hong Kong.

A little more than a year on, it seems to be tempting fate to try to finalize a second edition of this book. Much has changed over the past year, irrespective of the impact of the Covid-19 pandemic which has dominated many people's attention in 2020. In Hong Kong politics, the year which began with the June 2019 protests culminated in the controversial passage in Beijing of a national security law for Hong Kong on 30 June 2020, the eve of the twenty-third anniversary of Hong Kong's return to Chinese sovereignty.

This second edition contains a new Chapter 6 covering the last year in detail to the beginning of August 2020; too much has happened to include everything, and these events are recent and highly contested, but the chapter reflects my best efforts to make sensible judgements about them. This is followed by a new Conclusion which attempts another look at the future of Hong Kong. I have kept other changes to the first edition to a minimum.

Many of the underlying trends I identified in the first edition remain relevant today in the way that local, national and global forces are intertwined in shaping the politics of China's global city.

The Stability and Growth Pact (SGP) adopted shortly before the start of monetary union establishes binding fiscal rules for the participating countries. The aim of the SGP was and still is to put fiscal policy in a straitjacket assigning it an overall minor role in the EMU. To this end, the aim of the SGP from the beginning was to achieve a public budget that tends to be balanced over the business cycle (see Chapter 3). In the first phase of the EMU many countries violated the SGP terms, in some cases by a long way (see Figures 7.9 and 7.10). Even the larger member states such as Germany and France had public budget deficits higher than 3 per cent of GDP, thereby failing to comply with a core rule of the SGP. In response, the ECo tried to enforce appropriate sanctions against the delinquent countries. However, the ECo was called off by ECOFIN, resulting in no sanctions being imposed. On the contrary, in 2005 the rules of the covenant were softened considerably (see Chapter 7 for details).

For the advocates of the SGP these developments were a nightmare. The former German finance minister, Theo Waigel, under whose eyes the pact had been agreed, criticized the 2005 reforms in no uncertain terms: “The Kohl government enforced the Stability Pact in 1997 against fierce resistance. That Germany then failed to meet the criteria of the Stability Pact in 2002 and 2003 and instead of immediately correcting its sins, amended the Pact together with France was a mortal sin. In this way, rules and standards lose trust” (Waigel 2015: para 9). His position was shared by the Deutsche Bundesbank, among others, and reflected the attitude of parts of the political and scientific elite in Germany (Euractiv 2006).

The onset of the financial market crisis and the subsequent Great Recession led to a sharp rise in budget deficits across Europe. An expansive fiscal policy was implemented to combat a sharp downturn in all EMU-countries, however, it lacked coordination. As early as 2009, Germany decided to end expansionary fiscal policy and reduce its budget deficits.

Independent of the two-pillar strategy of the ECB overall development of the EMU conceals different developments in different member states. It would overburden this short book to cover all EMU countries in detail, so we have chosen to concentrate on the larger countries Germany, France and Italy, as well as on those countries which were the focus of attention after the outbreak of the financial market crisis (Greece, Ireland, Portugal and Spain, which together with crisis-ridden Italy are referred to as the PIIGS countries).

Interest rates, asset bubbles and GDP growth

A look at the real GDP growth rates before 2008 shows that Germany did not perform very well in the first phase of the EMU compared to other countries (see Figure 7.1). If one takes the real GDP in 1998 as the basis, then the German real GDP rose by 15.1 per cent up to 2007. Only Italy with 14.2 per cent fared worse. Portugal also counts among the group of countries with low growth with 17 per cent. In contrast, Ireland with 73.3 per cent, Spain with 40 per cent and Greece with 41 per cent experienced strong growth in real GDP for this period. The middle group during this period included France with a growth rate of 22.5 per cent, Austria with 25.4 per cent and the Netherlands with 25.7 per cent. By way of comparison the United States achieved growth of 29.8 per cent (OECD 2020).

The different growth rates result from the different macroeconomic regimes that prevailed in the respective countries. A first indication is provided by the development of long-term interest rates. Figure 7.2 shows the interest rates of government bonds with a ten-year maturity. These serve as a reference for longterm loans to the private sector, which usually has to pay slightly higher interest rates. Long-term interest rates are important for corporate investment and for household real estate purchases. Germany had the lowest interest rates before the start of EMU, as the D-Mark was the leading currency in the EMS (see Chapter 2).

In 2012 the monetary policy strategy changed fundamentally. The ECB was forced to take over the function as lender of last resort for public households, cut the refinancing rate to zero and start quantitative easing.

The ECB as lender of last resort for public budgets

Mario Draghi became president of the ECB on 1 November 2011 during an acute economic situation and stayed in this position until 28 October 2019. At this point the EMU had slid into a second recession and the financing problems of public budgets in a number of EMU states had increased. This was very clearly demonstrated by the rising interest rates that governments in a number of countries had to pay. At the same time in most EMU countries unemployment became more severe. It was not a question of if but when the euro area would break apart.

In this dramatic situation, the ECB overcame the EMU's greatest shortcoming at the time. It assumed the function of lender of last resort for public households; it had no other choice. Without a lender of last resort for public budgets, the monetary union would hardly have survived. In a memorable speech on 26 July 2012, Draghi initiated the turnaround: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough” (ECB 2012: para 19). And he added: “Now to the extent that … the size of these sovereign premia hampers the functioning of the monetary policy transmission channel, they come within our mandate” (ECB 2012: para 27). Angela Merkel certainly supported Draghi's course privately; at least there was no public criticism of it.

In September 2012 as a result of the ECB's change of strategy, outright monetary transactions (OMT) as a new monetary policy instrument were introduced. They allowed the unrestricted purchase of government bonds, so that state bankruptcy was ruled out. However, the promise of unlimited purchases of government securities was and is only valid if the country concerned falls under the EFSF/ESM rescue umbrella and follows the Troika's conditions.

The organizational structure of the European System of Central Banks

The structure of the European System of Central Banks (ESCB) complies with the provisions of the Maastricht Treaty. Since there was to be no “United States of Europe”, there was no political centre which, as in most nation states, could have become the owner of the ECB. Consequently, the ESCB was chosen as the mechanism for control and the ECB was founded as a subsidiary of the national central banks of all EU member states, which had to raise the equity capital for the ECB. That all EU member states became owners of the ECB was a clear sign that the EMU was being thought of as a project for the whole EU. The equity share depended on two determinants with equal weighting. Each EU member had to provide a proportionate share of equity dependent on its population share in the EU. The other 50 per cent was calculated on the basis of the national share of each country in the EU's GDP. The shares are regularly reviewed and adjusted. At the beginning of 2019, for example, Germany had 18.4 per cent, France 14.2 per cent and Estonia 0.2 per cent of the ECB's equity capital (ECB 2019e). Profits and losses of the ECB are according to the capital share only distributed to the members of the EMU.

Figure 4.1 gives an overview of the structure of the ESCB. The General Council of the ESCB comprises the president and vice-president of the ECB and the governors of the central banks of all EU member states. The other members of the ECB's Executive Board, a member of the ECo and the president of the European Council can participate in meetings but are not allowed to vote. The governors of the national central banks are appointed by the institutions of their respective countries. In Germany, for example, the president of the Deutsche Bundesbank is appointed by the federal president on the recommendation of the federal government. Although monetary policy issues are discussed in the General Council, it does not make decisions in this arena, nor regarding other important topics concerning the EMU.

From the British East India Company to Alibaba and Amazon, from Westminster to Washington and Beijing

When Microsoft CEO Bill Gates visited India in 2002, he was received and entertained by India's Prime Minister A. B. Vajpayee as if he were a head of state. On his visit Gates announced that Microsoft would invest $400 million in India over three years (Pigman 2010, p. 17). For at least three decades now, such diplomatic summits, as it were, between technology CEOs and heads of government have become the norm rather than an exception. One of the most significant ways that technology has changed diplomacy has been through the rise of large technology firms as actors on the diplomatic stage. What we think of as state– firm diplomacy today is not a new business, but it is evolving. Large firms intimately involved with international trade have been around since the seventeenth century. The original idea of the international system (or nationstates system) mainly referred to states and their governments and to how they interacted: through diplomacy between governments, including institutions they set up to make diplomacy easier, or through conflict and war. Most scholars agree that the modern system of nation-states began with the 1648 Peace of Westphalia, which ended the Thirty Years’ War between supporters of the Catholic Holy Roman Empire and Protestant states. Yet even from the beginning of the ‘Westphalia system’ of diplomacy, which was based upon the principle of sovereign equality of nation-states, private firms, if they were large enough, had sufficient resources, wealth, and negotiating capacity to function analogously to governments as diplomatic actors.

The first such companies were chartered by the parliaments of their home countries specifically to engage in international trade: firms such as the British East India Company (chartered in 1600), the Dutch East India Company (1602), the Virginia Companies (1606), and the Massachusetts Bay Company (1629). In order to trade, from the start these firms had to engage in diplomacy. The boundaries between firms and governments themselves were more fluid than it would appear initially. The English-chartered Massachusetts Bay Company and the Virginia Company of London effectively became the governments of the colonies of Massachusetts and Virginia respectively.

In 2016, two elections shocked the globe, challenging the foundations of the open trading, liberal global economy and the diplomatic comity that had enabled it to flourish since the end of the Second World War. On 23 June, voters in the United Kingdom cast ballots by a 52/ 48 percent margin in a referendum to withdraw from the European Union, after 43 years of membership in the largest, most successful economic and political integration project in human history. Five months later, the rabidly protectionist and openly anti-diplomatic presidential campaign of Donald Trump in the United States resulted in Trump's accumulating enough votes in the 1789 Constitution's Electoral College to secure the presidency (despite losing the popular vote by nearly 3 million votes). As events of the next three years in these two countries that were cornerstones of the diplomatic promotion of liberal trade worldwide in the nineteenth and twentieth centuries respectively would bear out, voters had taken a hatchet to a system of economic and diplomatic principles that had brought unprecedented economic fortune to their own forebears and to much of the world in the process.

But the votes of that annus horribilis 2016 were only the tip of the iceberg, or more precisely the tip of several interlocking icebergs, to use a soon-to-beanachronistic metaphor. A succession of crises afflicted the global economy, and international relations and the practice of diplomacy more broadly, in the second decade of the twenty-first century with particularly negative consequences for international trade. The global economy's recovery from the financial crisis of 2008 and the ‘Great Recession’ that followed was slower and more uneven than recoveries from other recent economic downturns. Emerging new technologies, extending from micro-targeting in advertising to robotics to machine learning and artificial intelligence (AI), have played a significant part in determining whose recovery has been strong and whose has been marginalized.

Taking a longer view, the evolution of both trade and diplomacy has always been driven by technological development: for trade, the invention of the wheel, the steam engine, the internet; for diplomacy, the telegraph, the telephone, email, and video conferencing.

Harder medium-term choices: diplomacy to govern superintelligence

If we manage to meet the challenge of the climate crisis with any degree of success, humanity will still have to survive the singularity, the emergence of superintelligence. We will have to establish a new relationship with superintelligent machines much more powerful than our own minds with the capacity to make their own choices about their objectives and the means to their ends (Kurzweil 2000; Bostrom 2014; Tegmark 2017). Superintelligent machines will be able to make these choices and implement strategies for achieving their objectives independently of and much faster than humans. In order to prevent superintelligent machines from making choices that are at best disadvantageous and at worst lethal to human civilization, we must engage in the types of existing diplomacy between governments, firms, and civil society that are required to govern the development of superintelligence before superintelligence emerges. We must prepare now for the diplomacy that will be needed to prevent the ‘breakout’ of superintelligence unconstrained by human-imposed curbs on its potential capacity to harm us.

In anticipation of the emergence of even benign superintelligence, we must prepare for superintelligent machines, in whatever form they take, to emerge as diplomatic actors in their own right. Establishing a working relationship with superintelligent machines may demand of us to create a wholly new form of diplomacy. The process of initiating a diplomatic collaborative relationship between humans and superintelligence might resemble the earliest human diplomatic encounters hypothesized by Sharp (2009, pp. 94– 95). Superintelligent machines as diplomatic actors could be as radically different from us humans as the very first other tribes that early human tribes discovered living across the nearest hill from their own village. Superintelligent machines will be thinking beings with their own ends and means that are intrinsically ‘other’ to us, in the way that different existing diplomatic actors are other to us today. We will need diplomacy to mediate and live with those differences into the future.

Webb (2019) recognizes that the challenges facing global society concerning how to govern the development of artificial general intelligence and superintelligence must be addressed through diplomacy.