What history can teach us about the eurozone

We keep being told that we are entering uncharted waters with the euro. Attending a meeting with some bankers this week to discuss the single currency, I was warned of the grim social consequences of the collapse of the euro, and the dangerous, inevitable rise of right-wing politics it would bring.

With the front page of the leading German daily newspaper last week talking about whether a military force might be needed to impose order on the streets of Athens, the conclusion on everyone’s lips was that we are on the brink not just of a meltdown of the euro, but of the collapse of law and order too.

Let’s hope the bankers are better with figures than with history – although, given recent events, I wouldn’t bet on it. The fact is that unpicking and rebuilding a currency is not as complicated or as difficult as we are led to believe, given the determination to get it right. Turning the clock back a thousand years provides a very relevant example.

The Roman Empire continued to flourish in the East after the repeated sacking of Rome itself in late antiquity. Centred on the city of New Rome – also known as Constantinople (modern Istanbul) – the empire’s success was for centuries underpinned by a single, stable currency. The value of its gold coinage was maintained with almost fanatical devotion. Regardless of whether government spending rose or fell, or if revenues were disrupted by enemy attacks or natural disasters, the precious metal content of the coins never altered.

With a notional fineness of the maximum 24 carats (effectively pure gold), the coins’ face value was underpinned by real value. They were key to providing stability, and a major reason why inflation seems to have been an almost unknown problem for much of the period. They were essential to long-distance trade: a coin offered on one side of the empire was valid and equal in value to that on another. Indeed, the currency was actively used outside the empire itself, for both international and local commerce. It provided a model for money minted as far away as Scandinavia and China.

But in the middle of the 11th century, the temptation to tinker proved irresistible. With the empire going through a huge demographic and economic boom, the government cut the coins’ gold content to allow more to be minted. Under controlled circumstances, this was not in itself a problem: it increased the number of coins in circulation, and in doing so, enable a greater velocity of exchange, thereby boosting taxable revenues.

 

But it had two negative side effects. First, it undermined confidence in the stability of the coinage. The idea emerged that the value of individual coins might be variable. Second, it set an unfortunate precedent. When problems abroad meant demands for higher military spending, at a time when the tax revenues were falling fast, the government resorted to the same tactic as Western governments in recent years: quantitative easing – pumping more and more money into the economy in the hope of buying time.

As with Europe today, the result was not just uncertainty, but a widening of the recession. The causes of the problems had not been addressed; simply parked in the hope that things would improve. When they did not, the empire faced bankruptcy. Officials even left the doors to the treasury wide open, reckoning there was no reason to lock vaults that were bare.

The solution came in four steps. First, austerity measures. Major infrastructure projects were shelved on the basis that the government could not afford to spend even more money. Second, one-off emergency taxes were imposed to raise money from those sitting on unused cash piles – for the Orthodox church of the 11th century, read Apple, Google, Pfizer, Coca-Cola today.

Third, the dismantling of the currency and its wholesale replacement with a coinage that had a new name and a new look and feel was a neat way to close the door on the past and move on. Fourth, after a suitable pause for breath, a revision of the tax system, with the government closing loopholes that the canny wealthy had been able to exploit with the help of their advisors and high-ranking contacts.

These steps laid the basis for a full re-boot of the economy. Foreign capital returned, reassured by a concerted policy of attracting investment, and by a rigid and stable currency, which was again underpinned by a government whose first priority was to balance the books, keep suitable reserves of capital, and only then embark on grandiose building schemes.

The process was a painful one for the man who oversaw it, the Emperor Alexios Komnenos. He faced assassination attempts, funded by wealthy citizens who resented the challenge to their power base, as well as public criticism and searing unpopularity with the intelligentsia. But he saw it through. The question now is whether Europe can throw up a politician with similarly broad shoulders.

As I told those bankers, sometimes looking back to see how other people solved problems can be more useful and interesting than guessing what might be about to happen; when I was told one pays better than the other, it was the most sensible thing I’d heard all day.

Dr Peter Frankopan is director of the Centre for Byzantine Research at Oxford University, and the author of The First Crusade: The Call from the East, published by Bodley Head, priced £22.95.