Martin Sandbu started to air his thoughts on the Eurozone crisis in his Financial Times column Free Lunch, as that crisis unfolded. He has now come up with a book which is as unfailingly closely-argued and thought-provoking as his articles, only more fully developed.

It is difficult not to like a book that challenges the conventional wisdom on both sides to the euro debate, i.e. the sceptics, who would like to see the common currency dead and buried, and the integrationists, who accept the sceptics’ argument that monetary union cannot work without fiscal union and political union—except of course they would welcome that prospect rather than abhor it.

It is even more difficult not to like a book that is provocative and bold all right, but at the same time entirely free of the smugness and self-righteousness that plague other books on the same subject. Europe’s orphan is highly critical of the actions (and inactions) of the European policy-making elite, and yet moderate in tone, even-handed, almost sympathetic to the motives of key policy actors as it criticizes them. And while the author is unimpressed by the merits of federal Europe (“a chasm the peoples of Europe are not willing to cross at all”, p. 265), he remains unapologetically committed to what he rightly sees as the core European ideal: a social market economy plus the pursuit of peace and prosperity through shared sovereignty. His personal background is unique: as a Norwegian, he has “no dog in this fight” (p. xiv); as a descendant of that unhappy part of Europe Timothy Snyder called the “Bloodlands” (his mother was born in Poland to a Polish mother and a Ukrainian father, who had met in forced labour in Nazi Germany), he explains he knows in his bones “how much the European project matters” (p. xiv).

Nothing wrong with the Euro

Unusually perceptive of the political and historical roots of monetary union, the author begins and ends his book by reminding readers of Altiero Spinelli’s call for “the definitive abolition of Europe’s division into national sovereign states” (p. 1). The common currency, even though not specifically mentioned in the Ventotene Manifesto, may be seen as the most radical answer to Spinelli’s call to end the nation state. At the same time, the success or failure of the euro could well turn out to be the ultimate test of Spinelli’s proposition.

In contrast to American economists such as Kenneth Rogoff and, more recently, Joseph Stiglitz, Sandbu argues that the architecture of the common currency has been wrongly blamed for the Eurozone crisis, and has been used as a decoy by policy makers for their own unforced errors.

The book has little sympathy for objections inspired by a narrow reading of “optimal currency area” theory (interestingly, its original proponent, Robert Mundell, came out in favour of the creation of the euro). In contrast to American economists such as Kenneth Rogoff (“a giant historical mistake”) and, more recently, Joseph Stiglitz (“fatally flawed from birth”), Sandbu argues that the architecture of the common currency has been wrongly blamed for the Eurozone crisis, and has been used as a decoy by policy makers for their own unforced errors.

In brief, his main thesis can be summed up in three main points. First, monetary integration is not the source of the Eurozone crisis. (“The current account asymmetries between the euro’s member economies before the crisis did not constitute a problem with the currency itself. […] The debt accumulations they amounted to would have happened anyway, as they did within and between other, non-euro, economies”, p. 266).

Next, the bailouts became inevitable not because there was not alternative, but only as a result of “ideological resistance to writing down debts—whether those of banks or those of sovereigns” (p. 266). (“The debt crisis that exploded in 2010 necessitated neither the international rescue loans nor the associated fiscal austerity at anywhere near the scale they were pursued. Public and private debt restructuring could and should have been carried out instead and before any rescue programmes”, p.266).

Last, the Eurozone can thrive even without a move to a fully-fledged federal Europe. (“Since the lack of fiscal and political union is not what caused the eurozone’s economic stagnation, it is wrong to think that this is a permanent flaw that will continue to weigh on the economy”, p. 267).

Counterfactual history

The book’s key assertion is that the worst of the Eurozone crisis (the economic misery and hollowing out of democracy in debtor countries, the growing discontent in creditor countries, the divisive politics of the bailouts, and the rise of nationalists and populists throughout the continent) could and should have been averted.

The euro’s design is erroneously blamed for ruling out any alternatives to the toxic bargain of financial transfers traded for contractionary policies. What really constrained policy-makers’ freedom of manoeuvre was not the euro but their reluctance to be honest with electorates about the inevitability of losses once the credit bubble burst, and to settle politically where those losses were going to fall (p. 167).

There is much to be said for this claim. It was all very convenient for politicians in northern member states to shrug off the Eurozone crisis as if it were a simple story of lazy and corrupt southerners living beyond their means. But, as Kenneth Dyson has pointed out, it is impossible to have “feckless debtors” without “reckless creditors”. Governments and firms and consumers in the European periphery had been undoubtedly unwise to borrow and spend huge amounts of money as if there was no tomorrow. However, the flip side of the coin was banks in core countries who had been unwise enough to throw those huge amounts of money into loans to the European periphery.

With hindsight, there is little doubt (at least, in the mind of this reviewer) that restructuring Greece’s public debt in May 2010, and Ireland’s private debt six months later, would have been the right thing to do. The question is, how realistic that option was.

The toxic politics of debt

Debt restructuring raises concern about its effects on both debtors (who might be tempted to accumulate debt all over again, in the expectation that it will eventually be written down) and creditors, who might be scared away from over-indebted countries or even, in the event of “contagion”, flee Europe as a whole.

he dismisses apocalyptic theories of imminent meltdown had Europe favoured bail-in over bailout at the outset, on the grounds that the definitive losses implicit in debt restructuring will certainly shock markets, but only temporarily

On the former point, the author argues that the sudden drying up of foreign lending, and the subsequent necessity of debtor countries to eliminate their primary deficit overnight (which, in the case of Greece in 2010, would have implied a fiscal consolidation of 10% of GDP, rather than the actual 5% achieved by Finance Minister George Papaconstantinou), can be relied upon to act as sufficient deterrent.

On the latter, he dismisses apocalyptic theories of imminent meltdown had Europe favoured bail-in over bailout at the outset, on the grounds that the definitive losses implicit in debt restructuring will certainly shock markets, but only temporarily: investors will see that debt restructuring has restored European peripheral economies to health, which will make them a far more attractive proposition than if they withered under austerity—and, in any case, the savings glut has to be invested somewhere.

But Sandbu also seems to suggest that failing to restructure debt, apart from an ideological fixation on the part of Jean-Claude Trichet’s European Central Bank, was a matter of a political miscalculation, especially on the part of Europe’s reluctant hegemon:

Germany should […] be blamed not for giving too little, but for giving too much. It was best placed to insist that Greece’s sovereign debt in private hands should be written down and, half a year later, that Irish banks should be restructured, before it acquiesced to rescue loans. In the ensuing years Berlin demanded and obtained restructurings in Greece and Cyprus. Its failure to do so at the outset, buckling instead to pressure from France and others, was the single most damaging mistake in the entire eurozone crisis (p. 267).

The problem is that, had Angela Merkel and Wolfgang Schäuble pressed for debt restructuring of Greek public debt in 2010, they would not have merely alienated their French allies but faced the wrath of German banks and German savers. As Karl Otto Pöhl, former head of the Bundesbank, actually said at the time, the Greek bailout, far from being a costly gesture of European solidarity towards a wayward member of the family, as is still portrayed in Germany and elsewhere, “was about something altogether different: it was about protecting German banks […] from debt write offs”. Far safer to revert to the effective clichés of “lazy and corrupt southerners” so dear to readers of Bild Zeitung.

Let a hundred flowers bloom

As for readers of Europe’s orphan, those concerned with the implications of the Eurozone crisis for democracy and stability in the continent will find many of its pages heart-warming. Sandbu views with alarm the rise of xenophobic populists, but looks more benevolently upon “thoughtful insurrectionists”, such as those in “the moderate wings of Syriza in Greece and Podemos in Spain” (p. 233). In view of the recent slide of the Greek government towards illiberal democracy, as seen in its clumsy attempts to control the judiciary and the media, one might argue that his optimism is misplaced. But whether the author is right here or wrong is less important than his broader point that the Eurozone urgently needs “to reopen the space for more national freedom in policymaking, above all in fiscal affairs, but also in reform policy”. In arguing this point, he sketches an attractive political alternative:

A country’s fortunes would be more clearly the responsibility of national governments, for which they could be held to account by their own electorates. That, in turn, would require both incumbents and challengers for power to articulate better what they would do for their people; blaming the foreigners would have less resonance than it does today. The result would be more heterogeneity in policymaking, and occasional attempts at radically different policies. While such attempts may fail, it is surely right for voters to be able to choose them (p. 240).

Can Europe have both democracy and monetary union? Sandbu argues that it can and it must. His suggestion seems to be: keep the Euro, set the conditions for speedy and painless bank restructuring to deal with future crises, explicitly abandon bailouts in favour of bail-ins.

Thoughtful insurrectionists and moderate reformists would compete for their electorates’ hearts and minds in a contest that is far less toxic and far more constructive than is currently the case both in debtor and creditor countries.

Stepping back to leap forward

Can Europe have both democracy and monetary union? Sandbu argues that it can and it must. His suggestion seems to be: keep the Euro, set the conditions for speedy and painless bank restructuring to deal with future crises, explicitly abandon bailouts in favour of bail-ins. But if that has a mildly eurosceptic whiff, his position is subtler still.

Paradoxically, greater national autonomy may encourage more integration. That does not have to mean steps towards fiscal and political union, though it could mean groups of countries voluntarily adopting elements of these. With less voter antagonism, countries may find it beneficial to deepen integration in specific areas with ‘coalitions of the willing’, subsets of likeminded European states. One possibility is the […] joint issuance of debt; eurobonds could be launched by those who want them, without waiting for Germany’s participation. There are other examples, the most significant of which would be pursued by France and Germany on a bilateral basis, but would be open to others to join, as many surely would (p. 241).

The argument is elegantly restated in the closing paragraph of the book:

It is in this paradox—a willingness to integrate further by nations whose national room for manoeuvre is restored—that the hope lies for the euro’s political purpose, and Spinelli’s vision, to be fulfilled. The promise of the euro was, and remains, that with one market and one money, Europe will move closer to speaking with one voice (p. 272).

Whether fully persuaded by his case for more national autonomy leading to greater European integration or not, I am sure students, scholars, and interested citizens will find reading this book as rewarding and intellectually stimulating an experience as I did.


 

il mulino      An abridged Italian version of this review has appeared on Il Mulino as part of an editorial partnership with EuVisions.


Photo Credits CC Falk Lademann



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INTELLECTUAL EUROPE REVIEW


Martin Sandbu, Europe’s Orphan: The Future of the Euro and the Politics of Debt. Princeton, NJ: Princeton University Press, 2015


Debt Crisis 

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Economic and Monetary Union

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