The Euro’s innocence. An excerpt from Martin Sandbu’s new book

August 31, 2017
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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.

The four main claims that the euro made a crisis more likely do not hold up to proper scrutiny. First, the compression of borrowing costs may have caused economic cycles to diverge – but the euro can hardly be blamed for this since the same phenomenon happened everywhere, and Eurozone governments in any case retained (but neglected) the ability to influence domestic access to credit. Second, prices and wages did develop very differently in the core and the periphery, and nominal exchange rates could not offset this. But this did not really happen in the traded sectors, so the euro cannot be accused of destroying export competitiveness. Third, huge intra-euro capital flows permitted current accounts to develop dangerously large asymmetries and finance unsustainable import binges. But this, too, happened outside the euro as much as inside it. In any case, the real problem is not external financing per se but the form it takes and the uses to which it is put, both of which national governments were in a position to influence. And fourth, while peripheral Eurozone economies indebted themselves in a currency their governments could not print at will, so did many non-eurozone countries through their banking systems. It is likely that the peripheral economies with the most unstable monetary history would have done the same outside of the single currency. Besides, the ability of such countries to print their way out of debt was as likely as not itself to become a destabilising factor in a balance-of-payments crisis; this is why they had chosen to give it up.

All these arguments are about the genesis of the crisis. The euro did, however, undeniably alter the form the crisis took and the way it unfolded. So the bigger question to which we must turn is: did the euro make the crisis worse because it made it harder for policymakers to handle it? The answer is no: the eurozone’s lamentable performance in the crisis has little to do with inherent features of the single currency and everything to do with a series of unforced errors by its leaders.