The euro, conceived as part of a grand and unifying vision for Europe, has, over the last few years, become tainted and often even blamed for the calamities that have occurred across parts of the Eurozone since the 2008 financial crisis broke. With the Greek crisis still very much bubbling below the surface, it is a surprise to see a new book published that comes to the defence of the beleaguered single currency, offering reasons why the euro isn’t doomed, and why past events had less to do with it and more to do with the actions of central banks, national governments and international creditors.
“Hard to love, quietly wished away by many, and all but impossible to expel, the euro has been disowned by its own kin,” writes Martin Sandbu, an economic commentator for the Financial Times, in his dense and opinionated tome, “Europe’s Orphan: The Future of the Euro and the Politics of Debt”, on the reasons for the economic crises that have struck many Eurozone member states and the reasons why the euro is still viable.
“Europe’s Orphan” goes against the conventional wisdom. It is not a light read, but rather a technically heavy and opinionated treatise on why the euro is unfairly blamed, when it was actually wholly avoidable macroeconomic decisions and policies that caused many of the problems.
By Sandbu’s reckoning, the euro had the great misfortune of being born into the greatest private credit bubble of all time, which made it possible for Eurozone economies to “postpone their reckoning with accumulated public debts and to allow new private debt mountains to build up”. When the reckoning did finally come, the euro became a handy scapegoat.
The Eurozone crisis was brought about by initially huge flows of capital that then came to a rapid halt around 2009–10, severely damaging the economies that had been on the receiving end. “To blame the euro for this, we must presuppose that the credit flows would have been smaller without it” – something Sandbu refuses to countenance.
While many believe that the structure of the monetary union made the crisis more likely to happen, the author disagrees, pointing out that large current account deficits and balance-of-payments crises are hardly unique to the Eurozone – indeed, they were happening simultaneously across other parts of the world. “They recur through history like visiting plagues of internationally mobile finance,” Sandbu writes.
Receiving countries would have over-borrowed whether part of a larger monetary currency or still maintaining their own national currencies, and lenders would have kept lending with or without the existence of the euro. Likewise, “membership of the single currency did not render governments powerless to mitigate or influence the credit flows.”
Sandbu does, however, agree that the euro altered the form that the crisis took and the way it unfolded, but maintains the problems had “little to do with inherent features of the single currency and everything to do with a series of unforced errors by its leaders”.
In particular, he blames the actions of the European Central Bank, the European Commission and the governments of lender countries demanding excessive fiscal austerity and monetary tightening rather than writing down debt – believing instead that public and private debt restructurings should have been carried out long before any rescue programmes.
The book highlights just how different eurozone countries are in their attitudes and fiscal mindsets – not exactly a revelation – and how this is the real challenge at the heart of the eurozone, in the past but also going forward.
Much of book is focused on the differences in position and attitude between cautious Germany versus the likes of Italy, Greece, Ireland and Spain. But Sandbu also dedicates time to France’s role in the eurozone and in eurozone policymaking, as well as Britain’s continued position outside the monetary union.
France is blamed for not taking the lead as an alternative voice to the path wanted by Germany. In fact, Sandbu sees this as a lost opportunity for France. “France could have chosen to cast itself as a leader of the most crisis-hit countries and those who saw the merit of an alternative policy,” he writes. “Had it picked its goals wisely and negotiated cleverly with Berlin, it could have combined the role of protector of the eurozone’s battered periphery with a restored position as Germany’s equal partner in the process of European integration… Paris has consistently punched below its weight since the onset of the crisis.”
In contrast to many, Sandbu spends much of the book defending the euro and suggesting that there are no major institutional changes required for the currency to enjoy a long and successful future. “This litany of errors committed by the eurozone paradoxically gives cause for cheer,” he writes.
The widespread view today is that the euro is damaged, and the euro experiment was launched far too quickly and without serious contingency plans in place. “Today, the idea that the euro is fundamentally flawed is so widespread that it is hard to imagine how Europe’s old and jealous nations could ever have embarked on history’s largest voluntary cessation of sovereignty,” he writes.
Yet Sandbu reminds us that in the early days, long before the financial crisis, there was a real sense of optimism regarding the single currency, and that for a decade the “marriage between eleven national currencies” (which quickly became 12 with the addition of Greek in 2001) was seen as a great success. He firmly believes that this state of affairs can one day return.
The recent Greek crisis, and the sense that more is yet to come, makes “Europe’s Orphan” a highly topical read for those grappling with the future of the euro as a currency, and the structure of the new Europe.
Europe’s Orphan: The Future of the Euro and the Politics of Debt, Martin Sandbu, Princeton University Press (September 2015)