Originally conceived as part of a unifying vision for Europe, the euro is now viewed as a millstone around the neck of a continent crippled by vast debts, sluggish economies, and growing populist dissent. In Europe's Orphan, leading economic commentator Martin Sandbu presents a compelling defense of the euro. He argues that rather than blaming the euro for the political and economic failures in Europe since the global financial crisis, the responsibility lies firmly on the authorities of the eurozone and its member countries. The eurozone's self-inflicted financial calamities and economic decline resulted from a toxic cocktail of unforced policy errors by bankers, politicians, and bureaucrats; the unhealthy coziness between finance and governments; and, above all, an extreme unwillingness to restructure debt.
Sandbu traces the origins of monetary union back to the desire for greater European unity after the Second World War. But the euro’s creation coincided with a credit bubble that governments chose not to rein in. Once the crisis hit, a battle of both ideas and interests led to the failure to aggressively restructure sovereign and bank debt. Ideologically informed choices set in motion dynamics that encouraged more economic mistakes and heightened political tensions within the eurozone. Sandbu concludes that the prevailing view that monetary union can only work with fiscal and political union is wrong and dangerousand risks sending the continent into further political paralysis and economic stagnation.
Contending that the euro has been wrongfully scapegoated for the eurozone’s troubles, Europe’s Orphan charts what actually must be done for the continent to achieve an economic and political recovery.
This revised edition contains a new preface addressing the economic and political implications of Brexit, as well as updated text throughout. Europe’s Orphan charts what actually must be done for the continent to achieve a full recovery.
|Publisher:||Princeton University Press|
|Edition description:||New With a new preface by the author on Brexit and an updated chapter on Britain's place in Europe after the EU referendum|
|Product dimensions:||6.00(w) x 9.20(h) x 0.90(d)|
About the Author
Martin Sandbu has been writing about economics for the Financial Times since 2009. Formerly the newspaper's economics leader writer, he currently writes the newspaper's Free Lunch premium economics newsletter. Previously, he was a senior research fellow at the Zicklin Center for Business Ethics Research at the Wharton School of the University of Pennsylvania. He is the author of Just Business: Arguments in Business Ethics.
Read an Excerpt
The Future of the Euro and the Politics of Debt
By Martin Sandbu
PRINCETON UNIVERSITY PRESSCopyright © 2015 Martin Sandbu
All rights reserved.
A Giant Historic Mistake?
The most ambitious vision of European unity was conceived in circumstances far more inauspicious than those putting it to the test today. The spring of 1941 was Europe's darkest hour, and Hitler's forces looked invincible. The Soviet Union was still allied with Nazi Germany; the United States stood on the sidelines of Europe's war. To believe that Europe might transcend national division would have taken extraordinary faith in humanity – or great naivety – most of all in the camps and prisons that held the opponents and victims of the continent's totalitarian regimes.
Yet at that very moment, in an eighteenth-century jail repurposed by Benito Mussolini on a volcanic rock off the tiny Italian island of Ventotene, Italian anti-Fascist prisoners were composing a programme for the political union of Europe after the Nazis' defeat. One of them was Altiero Spinelli, who would later become a European commissioner, a member of the European Parliament, and leader of the movement for a federal Europe.
In the 'Ventotene Manifesto', scribbled on cigarette paper and smuggled out to resistance movements across Europe, Spinelli and his fellow prisoners dismissed the relevance of old divisions between left and right. After the war, he wrote, the dividing line between the forces of progress and reaction would run right through traditional parties and pit those who aimed to restore the order of national sovereignty against those aspiring to a federated Europe:
The question which must first be resolved, without which any other progress is mere appearance, is that of the definitive abolition of Europe's division into national sovereign states.
The Ventotene Manifesto did not specifically mention the abolition of national currencies. But of all the efforts to dismantle the borders erected between the nations of Europe by two hot wars and one cold, the euro is the most radical answer to Spinelli's call for an end to the nation state. Rarely if ever has there been a greater voluntary concession of national sovereignty than Europe's Economic and Monetary Union (EMU), created with the promise of greater prosperity and stability, and a convergence of both status and destiny. There is no better test for Spinelli's proposition that Europe is best served by ever closer union than the success or failure of EMU.
In response to the eurozone debt crisis, EMU's leaders have moved towards sharing yet more sovereignty. They have pooled fiscal resources in rescue funds for cash-strapped governments; they have centralised control over policies through the conditions attached to the common funds; they have handed power over their banks to the European Central Bank. But among ordinary Europeans, these moves have generated resigned acceptance at best, and fierce rejection at worst, rather than any Spinelli-like enthusiasm for deeper integration. Many more people say things are going in the wrong direction in the European Union (EU) than in the right one. Those who distrust the EU outnumber those who trust it. Support for the single currency has weakened as its economy has struggled. So too has Europe's democratic legitimacy. A majority of Europeans believe their voice does not count in the EU, especially in the euro's most crisis-hit countries. Only 15 per cent of Europeans say they trust political parties; the distrust is again most dramatic in those countries worst hit by the eurozone crisis.
The euro was supposed to strengthen the union between European nation states by allowing the poorer 'peripheral' countries to catch up with the richer core, increasing prosperity for all, as well as permanently channelling the growing strength of a reunified Germany into a common European destiny. Instead, the periphery found itself abandoned by financial markets and fell into an economic black hole. The call for more German money put Berlin firmly in the driver's seat of European policymaking. In the rest of Europe, voters, creditors and debtors alike felt angry and disempowered. Rather than being the crowning glory of Europe's successful reconciliation, the common currency came to look more like a millstone around the continent's neck.
Much more is at stake than economic well-being. If a present-day economist had been able to go back in time and warn the Ventotene visionaries that Europe may not be an 'optimal currency area', that would have been the least of their concerns. Seven decades later, Angela Merkel, Germany's chancellor and Europe's most powerful politician, described the euro as a 'community of fate' in the same German parliament building that once housed the Ventotene prisoners' ultimate enemies:
Nobody should think that another fifty years of peace and prosperity in Europe can be taken for granted. It cannot. This is why I say: if the euro fails, Europe fails. That must not be allowed to pass. We have a historic duty to protect by all means within our reach Europe's work of unification, which our forefathers set in motion more than fifty years ago after centuries of hatred and bloodshed. None of us can foresee the consequences, were we to fail.
It would be naive to think that grand sentiments alone drive our leaders' decisions at times of crisis. But we should not be so cynical as to dismiss all their lofty rhetoric as cheap talk. Consciously or not, echoes of Spinelli's vision resonated through some leaders' minds when they conceded sovereignty to an extent unimaginable only a few years earlier.
The prospect of successful deeper integration in Europe depends not only on the euro's material success but also on a more fundamental fight over its political merit. Tragically, the policies that have been pursued, ostensibly to make the euro work better, have ground away at the public support needed to achieve that goal. No pooling of sovereignty can save the euro if its users are left thinking the euro is not worth saving.
Since the crisis, this battle of ideas has been dominated by the sceptics. As the euro's detractors see it, the single currency has already been put to the test and failed. A striking number of the euro's supposed friends have unwittingly strengthened their case.
Vindication of the Sceptics?
Downing Street might seem an unlikely home for European federalism, but in the summer of 2011, David Cameron, the then British prime minister, and George Osborne, his chancellor, urged their euro area counterparts to 'get a grip' on the economic crisis by moving decisively towards sharing tax revenues and budget powers. If Britain's leaders channelled Spinelli, they did so in plain self-interest: the eurozone sovereign debt crisis was shattering their hopes of an export-led recovery at home. Even so, their intervention gave up a long-held foreign policy tradition of opposing any European configuration of power without the United Kingdom at the top table. Their lack of visible consternation at doing so demonstrates that they truly believed this was necessary for Europe's monetary experiment not to end in disaster. Osborne's pithy diagnosis was that a 'remorseless logic' points from monetary union to fiscal union.
The 'remorseless logic' view is shared by many economists and policymakers, both within the eurozone and outside it. The general claim is that without some way of sharing economic resources, a monetary union is eventually bound to experience financial instability or economic depression, to the point where it will break up. The broad inspiration for this view is the 'optimum currency area' (OCA) theory pioneered by Robert Mundell (who, interestingly, has strongly supported EMU) half a century ago. The theory compares the benefits of monetary unification to those of using the exchange rate to maintain full employment in the face of economic disturbances. An OCA is a region in which the loss of this tool is outweighed by the gain of having fixed prices between countries. That will be the case when full employment can be achieved to a sufficient degree without exchange rate adjustments, e.g. through price and wage flexibility, easy displacement of workers and/or capital between regions of different economic fortunes, or private or government transfers between countries to insure against idiosyncratic economic disturbances. Those arguing in the OCA vein tend to doubt the presence in the eurozone of the required price/wage flexibility or worker/capital mobility, and therefore conclude that there is a need for some form of 'fiscal union' to cushion against unsynchronised swings in the economy. And for fiscal transfers to be politically acceptable, a 'political union' is also needed to establish shared control over how fiscal transfers are used.
To create the euro without a fiscal transfer mechanism and a political union to govern it was 'a giant historic mistake', Harvard economics professor Kenneth Rogoff has said, and many other prominent commentators have made a similar assessment. Some of those who thought the euro was a bad idea nevertheless take the 'remorseless logic' as a reason to push integration further rather than winding it back. As Martin Wolf puts it, creating the euro 'is the second-worst monetary idea its members are ever likely to have. Breaking it up is the worst.' For hardened eurosceptics, the 'remorseless logic' leads to the opposite conclusion. Seeing deeper integration as either unachievable or as compounding the damage already done, they predict and even encourage the dismantling of the single currency. One of the more eccentric encouragements was a £250,000 prize offered by Lord Wolfson in 2012 for the best proposal to manage an exit from the euro. Others are more serious. A determined group of German academics have made it their cause célèbre to take the eurozone's anti-crisis policies, which they see as covert transfer mechanisms, to the German constitutional court. In the summer of 2015, German finance minister Wolfgang Schäuble broke a taboo by proposing that Greece should 'temporarily' leave the euro if it could not pass the policies its creditors demanded. Most sinister is the rise of fringe parties that make undoing the single currency a main rallying point. In Germany, Alternative für Deutschland (Alternative for Germany) has achieved double-digit regional vote counts. The neo-Fascist Front National is France's biggest party and its leader a serious presidential contender. The protest party Movimento Cinque Stelle (Five Star Movement) commands up to a quarter of the Italian electorate and has won the mayoralty of Rome. Beyond the eurozone, the Brexit vote marks the eurosceptics' greatest victory.
One might have expected those committed to European integration to stand up for the euro's merits against these condemnations. But what is their reply to the sceptics who want the euro gone or diminished? That if the euro fails, Europe fails; that letting the euro disintegrate would do more harm than good. This is true, but in political terms it amounts to a discreet parricide of the euro's founders by their successors. To say we must stick with the euro now that we have come this far, or all hell will break loose, is to say it would have been better not to set out on this route to begin with. By capitulating to the view that design flaws in the euro caused the crisis, leaders gain a useful decoy for their own unforced policy errors but at the cost of their ability to formulate good policies and of voters' willingness to accept them.
The moves towards closer integration have been justified by the refrain: 'there is no alternative'. Through gritted teeth and holding their noses, political leaders have cajoled stunned electorates and bullied wary parliaments into lending money to crisishit neighbours (in creditor states) or accepting the disenfranchising conditions that come with the loans (in debtor states). Voters have been told there is no alternative but catastrophe to the financial rescues that shuffled loans in the hundreds of billions between governments, to draconian policy conditions extracted from the recipients of those loans, to a 'fiscal compact' that enshrines in international law German standards of fiscal discipline, or to new powers for Brussels to tell member states how to organise their economic affairs.
The currency bloc's official agenda is more of the same, even if the will to go through with it waxes and wanes. The road map to 'genuine' economic and monetary union, drawn up by the EU's highest officials at the behest of national leaders, accepts Osborne's remorseless logic in fact if not in name. It envisages, for example, that the single currency will be endowed with 'an appropriate fiscal capacity'. The plans have also endorsed the idea that countries should sign contracts that would legally prevent them from having second thoughts about reform promises, in return for more financial aid. The president of the European Central Bank has called for centralised powers over euro countries' structural economic policies. These are all building blocks of fiscal and political union. But they labour under the paradox of their own justification: that more powers must be unified to fix the damage unification has already wrought. That argument is not only unconvincing, it is also dangerous.
A Politics of Blackmail
Eurosceptics get many things wrong, most of all their inability to imagine that people could ever adopt European as well as national identities. It is as if they do not merely disagree with Spinelli, they cannot even understand him. What eurosceptics lack in imagination, however, they make up for in tactical political instinct from which the supporters of closer union would do well to learn.
The sceptics have long lambasted the EU's centralising trajectory as undemocratic and illegitimate. They charge that the euro rode roughshod over Europeans' resistance to giving up national sovereignty. European leaders do indeed have a disturbing tendency to harangue their peoples, sometimes through repeated referendums, until they make the right choice. The French approved the Maastricht Treaty with the thinnest of margins; the Danes only voted yes after they first voted no. The 2004 treaty on an EU constitution was rejected by referenda in both France and the Netherlands and had to be repackaged as the Lisbon Treaty (about which the two recalcitrant electorates were not asked to express an opinion).
The charge of illegitimacy is not wholly warranted – there is no authority in Brussels, Strasbourg or Frankfurt that was not vested there by democratic governments accountable to their national electorates. Still, making light of the need for popular consent is now exacting a price. The success of protest movements in many countries reflects a blowback against the political hubris with which European integration was pursued and a reaction against a political class that has presided over economic catastrophe. The former may be stronger in creditor states and the latter in debtor states, but either way, the management of the euro has unplugged classic wellsprings of populist protest.
Swathes of popular opinion object to the governing elite's chosen direction of travel. In creditor Europe, growing fatigue with financial aid is extinguishing the early willingness to help out neighbours in trouble. In debtor Europe, voters are hard put to say whether they resent the subordination to foreigners more than they despise their own political class. But the more that European politics concentrates on how to balance creditors' and debtors' interests, the more the trade-off itself – money from creditor states in return for control over debtor states – is taken for granted. Europe's politicians have almost without noticing it translated an economic conflict between classes (creditors and debtors) into a political conflict between nations. This cannot but undermine the broader solidarity the euro was meant to embody – a term, incidentally, which in the stultifying idiom of EU negotiations has been impoverished into a synonym for 'subsidy'.
As if it were not enough for Europeans to be told they are trapped in an imperfect monetary union that must be fixed, the substance of the alleged fix is the exact opposite of what they were promised when the euro was launched. Deficit countries were offered prosperity and equality with Germany; instead they have faced economic decline, social despair and political disempowerment. The Germans, and their fellow surplus countries, were promised they would never need to subsidise others, and even secured a treaty article they thought outlawed such subsidies. While the eurozone's rescue policies have largely survived legal challenges, it is clear that both political promises have been broken. If Europeans feel betrayed by the euro, it is because everything they are told about it implies that they have been.
This offers anti-European populists and extremists prolific recruiting conditions, while renouncing any positive argument that mainstream political forces could use to counter them. The guardians of the single currency have had nothing to offer beyond trying to beat voters into resignation. But pushing for greater integration on the basis that the first time round we did not try hard enough will erode what solidarity and aspiration to unity remains in Europe. This is not the politics of common purpose; it is the politics of reciprocal blackmail. The logical consequence is that the euro's governing elites eventually follow where they have driven their voters, and increasingly question whether monetary union is worth it. The bitterness of the Greek–German stand-off in the summer of 2015 sharply foreshadowed this future of disunity.
Excerpted from Europe's Orphan by Martin Sandbu. Copyright © 2015 Martin Sandbu. Excerpted by permission of PRINCETON UNIVERSITY PRESS.
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Table of Contents
- Frontmatter, pg. i
- Contents, pg. vii
- Preface, pg. xi
- ONE. A Giant Historic Mistake?, pg. 1
- TWO. Before the Fall, pg. 25
- THREE. Greece and the Idolatry of Debt, pg. 48
- FOUR. Ireland: The Private Is Political, pg. 80
- FIVE. Europe Digs Deeper, pg. 106
- SIX. Righting the Course: From Bail-Out to Bail-In, pg. 139
- SEVEN. If Europe Dared to Write Down Debt, pg. 165
- EIGHT. Europe’s Real Economic Challenges, pg. 189
- NINE. The Politics That the Euro Needs, pg. 217
- TEN. Great Britain or Little England?, pg. 242
- ELEVEN. Remembering What the Euro Is For, pg. 265
- Notes, pg. 273
- Index, pg. 303