Martin Sandbu, the economics leader writer for the Financial Times (FT), was the special guest at a recent talk at Birkbeck on 19 February. This event was organised under the auspices of the Birkbeck Politics Department’s MSc programme in European Politics & Policy in association with Birkbeck’s Departments of Management and Economics, Mathematics & Statistics.

As one of the UK’s most influential UK economics commentators, Martin provided his insight into whether Europe’s economy has turned a corner, and whether the Eurozone’s fragile recovery is sustainable. Here, Charles Shaw and Ahmed Razzaq of the Birkbeck Economics and Finance Society report from the event

In a recent talk at Birkbeck, FT’s Martin Sandbu located the economic failure of the Eurozone in institutional arrangements and policy choices that laid the basis for organisational deficiencies.

Financial Times columnist, Martin Sandbu

During the Eurozone crisis, the message from European policymakers was abundantly clear: that the euro fostered many of the recent problems, or at least was a strong contributor to the high budget deficits at the heart of the crisis, and that there was no alternative to the bailout packages. Subsequent large transfers from Germany to the debtor countries were therefore justified along these lines, in exchange for harsh austerity, overly tight monetary policy, and structural reforms.

In his new book – “Europe’s Orphan: The Future of the Euro and the Politics of Debt” – Martin Sandbu perceptively argues that this accepted orthodoxy is in fact at odds with history and evidence from the period. Nothing is wrong with the euro itself, he suggests. It is rather the policies of the governments of the Eurozone and the European Central Bank that were and are wrong. If true, what implication does this have for our understanding of the wider economy and the implementation of policy initiatives? Further, what can we expect in the short to medium term, given the costly spillover effects of a sustained drop in energy and commodity prices, and revived fears of a new recession in advanced economies?

BNP Paribas recently noted that last month was “the worst for risky assets for many years, if not on record.” Given this current affairs backdrop – of a recently announced date for the UK’s referendum on EU membership, and extremely negative levels of sentiment and investor positioning – Martin’s talk on the politics of Eurozone debt could not have been more timely.

Dispelling some of the post-crisis myths

European Central Bank in Frankfurt (Image copyright Eoghan OLlonnain via Flickr)

On the evening, Sandbu lucidly examined the case for the Euro, not by focussing on virtues of a single currency, but focusing instead on the failure of European macroeconomic policy and in particular the inflexibility of the European Central Bank, European Commission, and Member State Governments to allow for restructuring of private, and later sovereign, debt.

Many analyses of the crisis blamed an unholy trinity of weak financial regulation, ineffective supervision, and profligacy on the periphery. Sandbu was able to provide an important corrective to such gross simplifications and dispel some of the post-crisis myths by pointing out, for example, that profligacy was not at the core of the problem. With the exception of Greece, the economies that had to resort to bailouts were not those with the highest debt-to-GDP ratios.

This and other forms of evidence allowed Martin to convincingly make a nuanced case for the Euro being more of a scapegoat than catalyst in this affair. If there was a smoking gun in the run up to the crisis then, Sandbu argued, it was not the Euro per se. He went further, stating that the sovereign debt crisis would have likely occurred without the single currency due to the magnitude of nominal rigidities observed at macro level, incomplete institutional infrastructure, and the fact that Eurozone governments that ran into trouble had no lender of last resort.

When questioned on whether he would agree that a more centralised Europe would be better able to cope with these issues in the future, Sandbu would not be coaxed. Whilst sceptical of the utility of European fiscal and political union, Sandbu did identify efforts made in establishing Eurozone equity markets as conducive to heading off some of the risk of a similar debt crisis in the region going forward.

The ‘liquidationist’ alternative

If there was one take away from the evening it is that the Euro may not have caused the crisis but the main actors, in dealing with the crisis, compounded the severity of events. In what Martin Wolf described as the “liquidationist” alternative, Sandbu made the case for restructuring of debt and a softer landing, albeit with the pain of haircuts for bond holders.

This was a point of view recently echoed by Professor Lord King, Governor of the Bank of England throughout the period, who, in a recent talk at the London School of Economics, supported Sandbu’s call for a restructuring of Greek debt as the only way out of a Depression that he could not fathom getting so out of hand in the post-war period, let alone in the twenty-first century.

Sandbu is not a lone voice on this issue. Others, such as Ashoka Mody, the former IMF bail-out chief in Europe, have argued that ECB not only failed to provide stimulus to the Eurozone economy when needed, but, as a result of an apparent battle between political will and economic arithmetic, allowed it to slip into a “low-inflationary trap” (i.e. a negative feedback loop where inflation is dropping because the economy is weak, whilst the same economy being weakened by falling inflation).

According to Mody, the fact that ECB allowed the Eurozone to slip into such a predicament is a reflection of the monetary union’s faulty architecture. Such comments echo Milton Friedman’s infamous 1997 letter to The Times, which suggested that the economic foundations for the Eurozone are built on sand, and that the demise of the euro is possible, if not probable.

The Eurozone crisis appears to be in remission. However, with the expectation of a U.S. Federal Reserve interest rate rise, combined with the possibility of global shocks due to China’s rebalancing, the Eurozone cracks look set to increase in prominence. Martin Sandbu’s timely analysis is carefully defined, clearly presented, and one that serves as an important contribution to the current debate. His book, “Europe’s Orphan”, should be required reading for anyone seeking to understand the European financial crises, and is a sophisticated and accessible insight on an otherwise too commonly obfuscated and misrepresented topic.

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