The Euro is too serious a thing to leave it in the hands of the usual supporters

November 18, 2017
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LUISS University Press has just issued the Italian translation (La moneta rinnegata) of the latest effort by Martin Sandbu, passionate and competent commentator of the Financial Times, on the euro crisis. Given the mass of existing work on this subject, some scepticism about the usefulness of yet another essay was justified. However, once I plunged into it I quickly had to think again. Sandbu’s thesis, right from the very first pages of the book, is clear: the pro-Euro side is losing the battle of ideas against the supporters of the different –exits, because it accepts their fundamental premise, that is that a monetary union cannot function without a political union. Once this premise is accepted, the pro-European argument is strongly weakened, since a political Europe is as of now little more than a chimera that no one would believe as politically viable. The pro-Euro side does not have, therefore, much more than fear to oppose to exiters: leaving would cost too much, it would be destabilizing, it would leave small countries defenseless in the face of globalization, and so forth. All these claims are justifiable, but they are characterized by being “anti-” not “pro-“: none of them highlights the advantages of the European house, let alone of a single currency, instead emphasizing the costs of abandoning it, thereby implicitly admitting that there are no advantages.

Reading this criticism, which is very well argued for, it is impossible not to think of the British referendum campaign – during which the Remainers played the fear card, only to lose in the end – as well as the debate that followed the referendum, which focused exclusively on the costs and benefits of leaving the European Union.

The diverse and composite galaxy which opposes the Euro has managed to ingrain in the public debate the identity between the single currency and the neoliberal policies followed in Europe before and especially during the crisis. This is so far their only success, but not a minor one. The theory of optimum currency areas has been distorted as being intrinsically neoliberal, even if it had been elaborated by Robert Mundell, a Keynesian economist.  Summarized in a few sentences, the theory postulates that the main cost of abandoning monetary sovereignty is giving up monetary policy as an instrument of stabilization, and that adhering to a single currency is therefore optimal only when this instrument is not really necessary.  The rest follows logically from these premises. A first requirement for judging the optimality is symmetry: if the economies sharing the currency move together, a common monetary policy can meet everyone’s needs, and there is no need for national central banks. But even in the event of asymmetric shocks, joining the single currency can still be worthwhile: this is the case, for example, if asymmetric shocks can be absorbed by federal (mostly tax and benefits) transfers from one region to another, or by the flexibility of labor and goods markets, which make monetary policy superfluous; and if monetary policy is superfluous, it matters little – at that point – whether it is centralized or not.

In the original theory, consequently, flexibility was only one of the possible adjustment mechanisms of a monetary area. And, from an empirical point of view, not even the most important one as, thanks to the work of Jeffrey Sachs and Xavier Sala-i-Martin dating back to 1992, we know that even in a country where mobility and flexibility are as high as in the United States, market adjustments explain less than half of the adjustment following an asymmetric shock.

It is the common anti-Euro opinion, however, that flexibility is both the alpha and omega of any adjustment in the presence of a single currency, and as such it does not allow alternatives to a “right here, right now” exit from the single currency and possibly from the EU. In this respect, the supporters of the return to national currencies have been helped by the calamitous management of the latest crisis and by the fact that, precisely like them, the advocates of the status quo have also been insisting, in recent years, on more reforms and more market flexibility as the only possible recipe to get out of the crisis remaining within in the EMU.

Polar opposites have therefore been reached. Those who proposed and still insist on austerity and reforms, and those who supported the idea that the Euro is impossible to reform, share the equation that neoliberalism = Euro, which has therefore taken a place in the debate as fact.  Hence the so-called “loneliness of the reformist” that many of u have experienced (and I am sure Martin Sandbu has, too). Any criticism of the policies decided upon before and during the crisis, any proposal to improve the functioning of the single currency by accepting that the markets are not efficient and cannot absorb all the problems, has been branded on the one hand as vintage interventionism from a revolved Keynesian era and, on the other hand, as mere wishful thinking destined to clash with the strong powers that impose the neoliberal rules of the game on populations who are stripped of sovereignty. All of us, more or less consciously, lent ourselves to the portrayal of a flawed Euro, playing the game of both those who wanted to dismantle it and those who wanted to continue with the status quo. Sandbu’s book is important precisely because it unveils said game and highlights the real European problem, which is not the Euro itself (“Europe’s Orphan“, in the English title), but the policies that have been put in place before and during the crisis. Policies which were not inevitable and which, I might add, would probably not disappear if the single currency were to implode.  Like Martin Sandbu, I am convinced that the combination of austerity and reforms was not inescapable. Exactly like him and probably, being a citizen of the Eurozone, more stubbornly, I have been insisting since 2011 (see here and here as well) on the fact that the eurozone core countries, primarily Germany, could have accompanied fiscal consolidation in the so-called periphery (Greece, Spain, Portugal and Ireland) with expansionary policies; this would have made adjustment less painful and even more effective, with beneficial effects for those countries that were affected by the crisis, but also for the Euro area as a whole. It is not the Euro that prevented a fiscal expansion in Germany starting in 2010. It is not the Euro that dictated a narrative of the crisis axed on the fiscal profligacy of some “sinner” countries, an interpretation that appeared incorrect and the cause for huge policy mistakes since the very beginning to all of those who didn’t suffer from an ideological bias. What everyone seems to accept today, namely that it was a private debt crisis, back in 2010 in European circles was considered the thesis of some heretics, and to feel less lonely it was necessary to turn to Anglo-Saxon economists. The Euro has very little to do with the policies that have been followed, which were unsuitable and almost criminal because of the unnecessary suffering inflicted on the people of Europe; and it is misleading to think that the exit from the single currency would lead to a turnaround. We can witness with something akin to amazement the satisfaction of the European elites, who celebrate growth rates that are just about acceptable as if we were witnessing a new economic miracle; we can smile at the naivety of those who celebrated the election of Emmanuel Macron in France as marking the end of the populist wave (only to be quickly contradicted by the German elections); we can and must, in short, criticize almost all that’s been done since the beginning of the crisis, and I would even say since the beginning of the 1990s, but we must avoid falling prey of those who erroneously persist in identifying specific choices regarding economic policy with the institutions within which such choices are made. The bad decisions of recent years have their roots in a “New Consensus” that emerged in the 1980s, which basically incorporates the idea that markets are efficient, and therefore that the State’s role in regulating the economy is rather limited. It is therefore within this intellectual framework that we must place the choices of policymakers in advanced countries, even those who have never adopted the Euro.

It is true, however, and this puts me a slightly different position than Martin Sandbu’s, that the dominance of the New Consensus in Europe coincided with the construction of our “common home”, and influenced its conceptual structure. The Maastricht Treaty of 1992 wrote the rules of the game for the single European currency. In 1997, the Amsterdam Treaty completed the institutional framework with the Stability and Growth Pact, which set out the rules of the conduct for fiscal policy of the Euro area member countries. In accordance with that New Consensus, the main objective of the Stability Pact is to limit fiscal policy to the working of automatic stabilizers: structural deficit must be zero. The new Fiscal Compact, which was approved in a hurry in 2012, adds to this rule the constraint of reducing the excess public debt to the level of 60% in twenty years.

Monetary policy is also consistent with the New Consensus framework, given that the ECB only has to worry about inflation, and it also has considerable autonomy. There is a clear difference with the American Federal Reserve, whose statute, which dates back to the 1970s, entrusts it with the “double mandate” of pursuing price stability and full employment. The influence of a Keynesian economic vision, which was still dominant at that time, on the U.S. institutions is obvious.

Finally, the Single Act of 1986 completed what since the 1957 Treaty of Rome had been a pillar of the European Union, namely competition policy, aimed at contrasting all forms of market dominance, and therefore eliminating all the rigidities that prevent markets from converging towards the optimal equillibrium. The interpretation of competition policy by the European Commission and the rather rigid definition of “State aids” have effectively prevented all member states from implementing coherent industrial policies and long-term economic planning.

I am therefore convinced, probably more than Sandbu is, that European institutions have in some way favored the implementation of those policies that we both criticise. And that, therefore, especially considering that macroeconomic theory today is questioning the direction it needs to take, it is necessary to rethink the European institutions in order to make them more neutral with respect to established doctrine. But this sligthly different perspective from Sandbu does not change the fundamental truth that he unveils. Institutions may have influenced economic policies, but they have not determined them. Policy makers could have done more, they had to do more.

The more time goes by, the clearer it appears that Europe, and the Euro area as a whole, need to change profoundly in order to respond to the needs of populations exhausted after 10 years of crisis, populations who have been sold the same miraculous recipes over and over again for three decades. Since the 1990s, in Europe more than anywhere else in the world, politics has abandoned the ambition to influence market processes, trying to steer them towards socially desirable solutions. The idea that was central to Keynes, that is that economic policy consists in trying to manage the interactions between two imperfect institutions, State and Market, has been replaced by the conviction that the State must leave free space to supposedly efficient Markets. In Europe, more than anywhere else in the world, the adhering of political and intellectual elites to the New Consensus has led to an absent economic policy, managed by decision makers who grope around, with the only task of reaching accounting objectives. In Europe, more than anywhere else in the world, economic policy has abdicated the role of guiding and regulating the economy, and has given up on planning based on those long-term perspectives that the private sector often struggles to incorporate. It is this renunciation of the long-term perspective that is at the root of the “European disease”. It is my belief that it is easier (not easy; easier) to try to recover the nobility of politics and economic policy in a European context, rather than within small nation states competing with each other, and even more vulnerable to the various Bilderbergs that are agitating the nights of anti-Euro supporters.


La moneta rinnegata. L’euro, la crisi e i suoi veri colpevoli by Martin Sandbu is out now by LUISS University Press. On Saturday Nov 18, at BookCity Milano, the book has been discussed, in the presence of the author, by “our man in Paris” Francesco Saraceno together with Riccardo Perissich, Franco Bruni and Marco Valerio Lo Prete.