A Most Unholy Union

Martin Sandbu: Europe’s Orphan - The Future of the Euro and the Politics of Debt

The Wall Street Journal, November 5, 2015

Monetary union in Europe was not a pathway to more efficient markets but, at least in part, a dirigiste attempt to rein them in. The untidiness of Europe’s old foreign-exchange markets must have outraged Brussels’s central planners, but their fluctuations acted as invaluable warning signals to investors and lenders of trouble to come and, in the shape of a currency crisis or two, gave miscreant governments a powerful incentive to take away the punch bowl before it was too late. With the formal establishment of monetary union in 1999 (notes and coins were introduced in 2002), the peseta, the lira and all the other watchdogs were silenced, and there was no one to warn of the imbalances building up in a poorly designed, badly run, dangerously vulnerable monetary union yoking very different economies together.

In all probability a eurozone crisis was always a matter of when, not if, but that’s not how Martin Sandbu sees it. In “Europe’s Orphan,” he rejects the argument that the euro experiment was destined for disaster and seeks to make a case for monetary union more positive than today’s grudging acceptance that the EU has no choice other than to stay the course. The euro still can, Mr. Sandbu maintains, pave the way to the more closely (if more cleverly) integrated EU he would like to see while delivering increased trade, more efficiently directed investment and the elimination of exchange risk—a pretty picture, difficult to reconcile with the bubbles, busts and panics that have defined the euro’s existence so far.

The book’s core is an intriguing, if one-sided and left-leaning, account of the euro’s rise, near death and nursemaided recovery. Mr. Sandbu, a columnist for the Financial Times, slashes away at much of the downbeat conventional wisdom surrounding the single currency, most notably the conviction that it needs a fiscal union to make it work. He argues that many of the eurozone’s woes are attributable to “unforced” errors (such as the refusal to arrange an orderly restructuring of Greek debt in 2010 and what Mr. Sandbu sees as an ill-timed emphasis on fiscal tightening throughout the eurozone over the following two years). They thus were far from inevitable. Well-written and closely argued, “Europe’s Orphan” ought to delight the smarter supporters of European integration and will challenge some long-held assumptions of their euroskeptic opponents, not least the perception that the currency union has gnawed away at the international competitiveness of the eurozone’s weaker economies.

Mr. Sandbu is right that the terms of the eurozone bailouts have been sometimes counterproductively harsh. But he does not appear to accept that, at bottom, this was a consequence of German democratic pressure rather than an outbreak of Teutonic fiscal sadism. When the euro was taking shape, German Chancellor Helmut Kohl, gripped by his own European obsession, conscripted his countrymen into becoming the linchpin of a new currency they didn’t want. As a sop of sorts, they were promised that they would never have to pick up the tab for deadbeats elsewhere in the eurozone and, crucially, that the European Central Bank would act like the stern Bundesbank writ large. Those guarantees now lie in ruins, but not before causing a great deal of economic pain.

The ends may (arguably) justify the means used to shepherd the euro through its darkest hours, but those means shaded into lawlessness and repeatedly made a mockery of democracy, both in the countries that funded the bailouts and—something that evidently worries Mr. Sandbu, a friend of the underdog—in a number of the countries that either received the proceeds or, in the case of Italy, were nearing the danger zone.

Unlike most europhiles, Mr. Sandbu has a political prescription that involves more than handing additional power to the European Parliament—a body that, in the absence of a genuine European demos, has little democratic legitimacy. He argues that member-states should be far freer to set their own budgetary policies than the current German-dominated regime would permit. There should also be an understanding that if they go bust, there will be no bailouts. Then, instead of a forced march to fiscal union, further integration (such as jointly issued debt by like-minded member-states) could be arranged step-by-step by a series of coalitions of the willing.

This plan would be doomed, however, for reasons both economic and political. Countries that share a currency must move in a convoy. Can a Greece or Portugal really be expected to keep up if Germany, as it will, sets the pace? If not, stagnation (or worse) awaits them unless monetary union is supplemented by the fiscal union required to ensure that sufficient funds are transferred from the eurozone’s richer members to its stragglers. Mr. Sandbu may disagree that such a “transfer union” would be needed, but that’s a minority view and one, critically, that a nervous Germany does not share.

No less important, Mr. Sandbu’s bottom-up idea for further integration does not fit into Brussels’s technocratic vision of an “ever closer union,” a vision rooted in the notion that nation-states are too dangerous and too inefficient to be allowed to survive. The replacement of national currencies by the euro was a reflection of the traditional continental distrust of the free market, but more than anything it was driven by the desire to transfer yet another massive slice of sovereignty to supranational control. Even if economic necessity does not, political imperatives will lead the eurozone to the next stage, fiscal union, driving democracy “ever closer” to the grave.