Europe’s Orphan: The Future of the Euro and the Politics of Debt by Martin Sandbu (Princeton, £20.95)
The Global Minotaur: America, Europe and the Future of the Global Economy by Yanis Varoufakis (Zed Books, £8.99)
The euro is a hopelessly flawed project doomed to disaster from the start. A one-size-fits-all monetary policy allowed a country like Greece to borrow money on almost the same terms as Germany, and so build up enormous debts that it was never going to be able to repay. When the crunch came, the tensions that always exist between creditors and debtors swiftly turned into political hostility between nations, as the first group pressed for increasing controls over the domestic economies of the second.
That is now conventional wisdom in large parts of Europe, and it is based on ideas that have been around for a very long time. Back in 1997, Foreign Affairs published an article on European Monetary Union by the US economist Martin Feldstein under the eye-catching heading “EMU and War.” In this, he argued that rigidities in the European economy—inflexible labour markets, the lack of fiscal transfers from country to country and the inability of workers to move long distances to find work—meant that the system would not be able to cope with a big economic shock in the resilient way that is possible in the US.
For this reason, the new currency could lead over time to increased conflict between the nation states of Europe. Not quite war, perhaps, but something pretty ugly.
So it seems to have turned out, with devastating economic and political consequences. And it’s in response to this kind of argument that political leaders in Europe are now suggesting that the only way out of the mess is for eurozone countries to move decisively towards sharing tax revenues and budget powers. Chancellor George Osborne has spoken of the “remorseless logic” of a shift from monetary to fiscal union.
In other words, the only way to fix the damage caused by monetary integration is to integrate fiscal powers as well. That may seem like a paradoxical argument, and it is one that is being promoted not from any sense of optimism or economic wellbeing, but rather because there appears to be no alternative. But what if it’s wrong?
Martin Sandbu believes that there is indeed a better way, and that the idea of “remorseless logic” is not only unconvincing; it is dangerous. In this stimulating and entertaining book, he argues persuasively that it is not design flaws in the euro that have caused today’s problems. Instead, they are the result of a series of massive unforced errors by the political leaders of the eurozone from the early days of the crisis. Far from pressing for greater integration, recovery requires a restored sense of national autonomy across the eurozone countries.
He starts with a view that a country like Greece would have got into trouble even if it had not been part of the single currency. At a time when banks were throwing money at American home-buyers with no income, and at Icelandic banks with no investment record, does anyone think they would have had qualms about doing the same to Greek borrowers, even if it had not been in the eurozone? It was a global credit bubble that fatally undermined the fiscal discipline that the euro was intended to impose: you can’t blame the monetary system for what happened.
But once the crisis hit, surely the debtor countries would have been better placed to cope if they had had their own central banks and a freely floating currency? Sandbu’s answer is that the inevitable problems were greatly exacerbated by the misjudgements of policymakers, which led to much higher economic costs and political conflicts that are still being worked through. At the root of it all, he argues, lies the refusal to accept that debts that cannot be paid back won’t ever be: it is much worse to pretend that they will than it is to manage their restructuring in an orderly fashion.
In Greece, this misjudgement led in 2010 to a rejection of a necessary debt write-down and a long period of brinkmanship and mutual mistrust in which Athens decided that the eurozone would pay up even if the country failed to meet its commitments, and acted accordingly.
In Ireland, it was not fiscal irresponsibility that caused the trouble: 10 years ago, its public finances were in a much better state than those of most euro countries, including Germany. Rather it was a rapidly growing banking sector channelling large sums of money into speculative real estate that brought about the crisis. The disaster here came from the decision to issue a sovereign guarantee to a banking system that was visibly sinking under the weight of its dud loans. In Sandbu’s words: “In its attempt to win back the market’s trust in Irish banks, the Irish government found it increasingly hard to retain their trust in itself.” That led to a self-reinforcing panic, and a steep decline in Ireland’s creditworthiness.
Across all the debtor countries, the decision to bail out bank creditors—rather than forcing them to share the pain—added to public debt. This in turn led to fiscal tightening that held down economic activity and with it the output from which debt service could be repaid.
And throughout the early years of the crisis, the European Central Bank seemed consistently behind the curve, with an over-tight monetary policy and a willingness sometimes to go beyond its remit to push against any pressure for debt restructuring.
What were the explanations for these apparently perverse policies? Sandbu offers a menu of plausible suggestions. One was that banks play a significantly bigger role in the European economy than they do in the United States, where the securities markets are much more developed. Policymakers seem to have suffered from what Sandbu calls “Europe’s Lehman syndrome”—an exaggerated fear, unfounded as it turned out in the case of Cyprus—that the decision to make one bank take a hit might have catastrophic consequences across the system. There was also, particularly in some countries, a decidedly over-cosy relationship between politicians and the banking sector, which made it harder to take tough action. One example was Bankia in Spain which was headed by a former Finance Minister and Managing Director of the International Monetary Fund. Then there were the prejudices of individual countries. The French, for example, seem to have been averse to the idea of markets being allowed to get the better of governments, making it anathema to restructure sovereign debt or to let banks fend for themselves as opposed to bailing them out at the expense of the taxpayer.
Germany, for its part, has been constrained by domestic politics, a growing concern that good money is being thrown after bad and the view that thrifty German citizens are being taken for a ride by the spendthrifts of the south.
In the case of Greece, this has become counterproductive. What is needed is an overhaul of the entire social model, something that can only be achieved with a deep cultural and political commitment to change. The likelihood of that happening when the terms are seen to have been imposed by unfeeling outsiders is close to zero.
That, at any rate, is the message of The Global Minotaur by Yanis Varoufakis, the former Greek Finance Minister, and a man who shares the unusual distinction of being both number two in Prospect’s league table of World Thinkers of 2015 and the most loathed person in Brussels for years. His book makes it easier to understand the second of these attributes than it does the first. First published in 2011, it is a polemic riddled with conspiracy theories, the most notable being the idea that global economics and politics since the war have been shaped mainly by the need to make regular and substantial sacrifices to the Global Minotaur that is Wall Street.
There’s more. The surplus eurozone countries, he believes, have no interest in resolving the euro crisis, because by so doing they “would forfeit the immense bargaining power that the simmering crisis hands the German government vis-à-vis France and the deficit countries.” You can guess how well that must have gone down in Berlin.
Beneath the bombast and the outrageous claims, however, you can glimpse some of the ideas that come across more coherently in Sandbu’s book. Among them: restructure the deficit countries’ debt and relax the external restraints on their fiscal autonomy, thereby reducing the need for austerity. Reschedule loans from the European Central Bank, and look for other ways to restore a greater degree of policymaking freedom to the debtor nations. In return, require countries to take greater national responsibility for the choices they make, up to and including an orderly restructuring of a government’s sovereign debt if they get things badly wrong. It must be clear beyond doubt both to them and to the financial markets that they will pay the full cost of any errors. Some kind of corner may already have been turned. From late 2011, the European Central Bank started to reverse its monetary tightening, a process that has been taken further in the past couple of years. The pace of fiscal austerity has been eased, and efforts to end the fragmentation of the financial markets have been initiated. Part of the Greek debt has been dealt with, and after much shilly-shallying the Cypriot banks have been forced to take write-downs.
Sandbu makes it easier for critics to dismiss him as a hopeless romantic by arguing that both the United Kingdom and the eurozone would have benefited from UK membership: the alternative for the UK, he suggests, might eventually be something like a Greater Guernsey. But he has performed a public service by challenging the present dreary consensus on the fate of the euro and, in his final chapter, by reminding us what the single currency was for.
Successful monetary union is good for trade, makes it easier to invest across borders, and sustains the single market (imagine the wave of competitive devaluations over the past half dozen years in its absence). In a dangerous world, Europe needs to regain confidence in its own achievements, and that includes the euro. The peaceful sharing of sovereignty is undermined when politics is defined by a zero-sum game between creditors and debtors, and trouble follows when low wages become a policy goal. The European Union can and must do better.
That is now conventional wisdom in large parts of Europe, and it is based on ideas that have been around for a very long time. Back in 1997, Foreign Affairs published an article on European Monetary Union by the US economist Martin Feldstein under the eye-catching heading “EMU and War.” In this, he argued that rigidities in the European economy—inflexible labour markets, the lack of fiscal transfers from country to country and the inability of workers to move long distances to find work—meant that the system would not be able to cope with a big economic shock in the resilient way that is possible in the US.
For this reason, the new currency could lead over time to increased conflict between the nation states of Europe. Not quite war, perhaps, but something pretty ugly.
So it seems to have turned out, with devastating economic and political consequences. And it’s in response to this kind of argument that political leaders in Europe are now suggesting that the only way out of the mess is for eurozone countries to move decisively towards sharing tax revenues and budget powers. Chancellor George Osborne has spoken of the “remorseless logic” of a shift from monetary to fiscal union.
In other words, the only way to fix the damage caused by monetary integration is to integrate fiscal powers as well. That may seem like a paradoxical argument, and it is one that is being promoted not from any sense of optimism or economic wellbeing, but rather because there appears to be no alternative. But what if it’s wrong?
Martin Sandbu believes that there is indeed a better way, and that the idea of “remorseless logic” is not only unconvincing; it is dangerous. In this stimulating and entertaining book, he argues persuasively that it is not design flaws in the euro that have caused today’s problems. Instead, they are the result of a series of massive unforced errors by the political leaders of the eurozone from the early days of the crisis. Far from pressing for greater integration, recovery requires a restored sense of national autonomy across the eurozone countries.
He starts with a view that a country like Greece would have got into trouble even if it had not been part of the single currency. At a time when banks were throwing money at American home-buyers with no income, and at Icelandic banks with no investment record, does anyone think they would have had qualms about doing the same to Greek borrowers, even if it had not been in the eurozone? It was a global credit bubble that fatally undermined the fiscal discipline that the euro was intended to impose: you can’t blame the monetary system for what happened.
But once the crisis hit, surely the debtor countries would have been better placed to cope if they had had their own central banks and a freely floating currency? Sandbu’s answer is that the inevitable problems were greatly exacerbated by the misjudgements of policymakers, which led to much higher economic costs and political conflicts that are still being worked through. At the root of it all, he argues, lies the refusal to accept that debts that cannot be paid back won’t ever be: it is much worse to pretend that they will than it is to manage their restructuring in an orderly fashion.
In Greece, this misjudgement led in 2010 to a rejection of a necessary debt write-down and a long period of brinkmanship and mutual mistrust in which Athens decided that the eurozone would pay up even if the country failed to meet its commitments, and acted accordingly.
In Ireland, it was not fiscal irresponsibility that caused the trouble: 10 years ago, its public finances were in a much better state than those of most euro countries, including Germany. Rather it was a rapidly growing banking sector channelling large sums of money into speculative real estate that brought about the crisis. The disaster here came from the decision to issue a sovereign guarantee to a banking system that was visibly sinking under the weight of its dud loans. In Sandbu’s words: “In its attempt to win back the market’s trust in Irish banks, the Irish government found it increasingly hard to retain their trust in itself.” That led to a self-reinforcing panic, and a steep decline in Ireland’s creditworthiness.
Across all the debtor countries, the decision to bail out bank creditors—rather than forcing them to share the pain—added to public debt. This in turn led to fiscal tightening that held down economic activity and with it the output from which debt service could be repaid.
And throughout the early years of the crisis, the European Central Bank seemed consistently behind the curve, with an over-tight monetary policy and a willingness sometimes to go beyond its remit to push against any pressure for debt restructuring.
What were the explanations for these apparently perverse policies? Sandbu offers a menu of plausible suggestions. One was that banks play a significantly bigger role in the European economy than they do in the United States, where the securities markets are much more developed. Policymakers seem to have suffered from what Sandbu calls “Europe’s Lehman syndrome”—an exaggerated fear, unfounded as it turned out in the case of Cyprus—that the decision to make one bank take a hit might have catastrophic consequences across the system. There was also, particularly in some countries, a decidedly over-cosy relationship between politicians and the banking sector, which made it harder to take tough action. One example was Bankia in Spain which was headed by a former Finance Minister and Managing Director of the International Monetary Fund. Then there were the prejudices of individual countries. The French, for example, seem to have been averse to the idea of markets being allowed to get the better of governments, making it anathema to restructure sovereign debt or to let banks fend for themselves as opposed to bailing them out at the expense of the taxpayer.
Germany, for its part, has been constrained by domestic politics, a growing concern that good money is being thrown after bad and the view that thrifty German citizens are being taken for a ride by the spendthrifts of the south.
"Yanis Varoufakis: both number two in Prospect’s league table of World Thinkers of 2015 and the most loathed person in Brussels for years"So creditors have been demanding increasing degrees of control over debtor countries in return for their continued support, in the process weakening democratic decision-making in national economic policy. When trust has broken down, these controls have grown increasingly detailed.
In the case of Greece, this has become counterproductive. What is needed is an overhaul of the entire social model, something that can only be achieved with a deep cultural and political commitment to change. The likelihood of that happening when the terms are seen to have been imposed by unfeeling outsiders is close to zero.
That, at any rate, is the message of The Global Minotaur by Yanis Varoufakis, the former Greek Finance Minister, and a man who shares the unusual distinction of being both number two in Prospect’s league table of World Thinkers of 2015 and the most loathed person in Brussels for years. His book makes it easier to understand the second of these attributes than it does the first. First published in 2011, it is a polemic riddled with conspiracy theories, the most notable being the idea that global economics and politics since the war have been shaped mainly by the need to make regular and substantial sacrifices to the Global Minotaur that is Wall Street.
There’s more. The surplus eurozone countries, he believes, have no interest in resolving the euro crisis, because by so doing they “would forfeit the immense bargaining power that the simmering crisis hands the German government vis-à-vis France and the deficit countries.” You can guess how well that must have gone down in Berlin.
Beneath the bombast and the outrageous claims, however, you can glimpse some of the ideas that come across more coherently in Sandbu’s book. Among them: restructure the deficit countries’ debt and relax the external restraints on their fiscal autonomy, thereby reducing the need for austerity. Reschedule loans from the European Central Bank, and look for other ways to restore a greater degree of policymaking freedom to the debtor nations. In return, require countries to take greater national responsibility for the choices they make, up to and including an orderly restructuring of a government’s sovereign debt if they get things badly wrong. It must be clear beyond doubt both to them and to the financial markets that they will pay the full cost of any errors. Some kind of corner may already have been turned. From late 2011, the European Central Bank started to reverse its monetary tightening, a process that has been taken further in the past couple of years. The pace of fiscal austerity has been eased, and efforts to end the fragmentation of the financial markets have been initiated. Part of the Greek debt has been dealt with, and after much shilly-shallying the Cypriot banks have been forced to take write-downs.
Sandbu makes it easier for critics to dismiss him as a hopeless romantic by arguing that both the United Kingdom and the eurozone would have benefited from UK membership: the alternative for the UK, he suggests, might eventually be something like a Greater Guernsey. But he has performed a public service by challenging the present dreary consensus on the fate of the euro and, in his final chapter, by reminding us what the single currency was for.
Successful monetary union is good for trade, makes it easier to invest across borders, and sustains the single market (imagine the wave of competitive devaluations over the past half dozen years in its absence). In a dangerous world, Europe needs to regain confidence in its own achievements, and that includes the euro. The peaceful sharing of sovereignty is undermined when politics is defined by a zero-sum game between creditors and debtors, and trouble follows when low wages become a policy goal. The European Union can and must do better.
