The Disowned Currency. An extract from Martin Sandbu’s latest book

August 7, 2017
Book Europe
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An extract from the book Europe’s Orphan The Future of the Euro and the Politics of Debt by Martin Sandbu © Princeton University Press 2017. Reproduced here under kind permission. The Italian translation of the volume will be out soon for LUISS University Press

By arguing that there is no alternative to their policies, lest the euro fails, the Eurozone leaders have produced a useful decoy for their own mistakes. But since the “remorseless logic” endorses the notion that the euro was designed with dangerous and unsustainable flaws, these leaders have by the same token relegated their common currency to the status of an inconvenient foundling. Hard to love, quietly wished away by many, and all but impossible to expel, the euro has been disowned by its own kin. The loftiest aspiration Europe seems able to muster for its own creation is that a thorough reform of its character will make something good of it yet. But just as an orphan inconveniently dumped on its relatives arouses resentment and guilt rather than love, an orphaned euro cannot inspire loyalty or affection. Citizens of democratic societies expect to be authors of their collective destiny, not aimless elements of remorseless logic. The more often Europeans are told they have no choice, the more their resentment towards the euro will grow.

This book refutes the claim that there is no alternative, within the euro, to greater transfers of resources and more tightly centralised control over national policy autonomy. It rejects the supposedly remorseless logic as being neither remorseless not logical. Instead it aims to show that the disastrous political and economic experience of so many Eurozone countries was caused by policymakers’ entirely avoidable errors. The structure of the euro, as a monetary union without a fiscal union, did not force their hand: they retained alternative policy options that would have had much better results, economically and politically, than the ones they actually pursued. Had leaders made better choices, worries of a currency break-up would never have been awakened.

There are two ways in which the allegedly flawed structure of Europe’s monetary union is blamed for a crisis that first erupted in US mortgages. One is its role in creating the crisis: because of their monetary union, so the charge goes, European economies racked up greater risks in the 2000s boom than they would have done had they kept their individual currencies. The other is in how it unfolded: whether or not the euro made a crisis more likely, it stands accused of taking out of policymakers’ hands the best tools with which to fight it. Most of the rest of this book is devoted to the latter claim, but first, chapter 2 addresses the former. It outlines the main ways people argue that the euro sowed the seeds of disaster and concludes that these arguments do not stand up well to scrutiny. Our best guess is that the excessive debt and credit build-ups that have been at the heart of the eurozone’s near-death experience would have happened in much the same way without the euro.

In any case – and this is the theme of the rest of the book – the crisis was not preordained to develop the way it did because of the euro’s construction […]. Eurozone leaders made mistakes not because the euro left them with no alternative, but because of misguided ideas about what was needed – above all the idea that debt restructuring must be avoided at any costs.