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Event Summaries
October 21, 2015

Event Summary: Europe’s Orphan: The Future of the Euro and the Politics of Debt

by
Svi Freedman

On Wednesday evening 21st October, the Henry Jackson Society welcomed internationally renowned speaker Dr Martin Sandbu. Baroness Falkner first read out Sandbu’s impressive resume: before working for the Financial Times as a Free Lunch columnist and economic writer, he was a policy advisor in economics and political economy. He also holds a PHD in political economy and government from Harvard in 2003.

Sandbu set the tone by recalling the jail cell of Altierio Spinelli in fascist Mussolini Italy in 1941. While in jail, Spinelli completed the Ventotene Manifesto, asserting that prosperity and unity in Europe can only be achieved when the nation state is abolished, and replaced with a European Union, which transcends national boundaries.

Sandbu aims to dispel the popular premise that the Eurozone and European integration has constrained European prosperity and progress, arguing that, in fact, it is an enabling factor. Euro critics usually stem from two schools: the Eurosceptics who believe that monetary union is doomed to fail because it eliminates national sovereignty, and from those that believe the Eurozone does not go far enough, i.e. they propose more integration as a panacea for the failures of integration. Sandbu claims the recent failures of the Eurozone economies have actually been caused, not by the monetary union, but by avoidable government failures in economic management.

He explains to us that it was not the Euro and its implications on exports which caused the economic turmoil in the Eurozone’s peripheral economies, such as Greece and Spain, but rather the irresponsible and unsustainable economic and banking practices, which took place during the pre-financial crisis boom.

He then claims that the ensuing debt crisis was mismanaged by the leaders of these countries, who opted to protect their stock and by squeezing the flow and commit to honouring all existing debt (even though they could not keep to this), rather than reducing its flow by debt restructuring and debt write offs, which gradually allow flows to adjust.

In Sandbu’s view, choosing the latter method of debt management would have avoided putting any further strain on Eurozone peripheral economies and avoided the resulting scenario in which debt burdens increased as governments squeezed spending in an attempt to fund the budget deficit. In fact, it was the Euro that offered European governments both these debt crisis solutions and so it seems unfair to blame the monetary union for European leaders’ wrong decisions.

The discussion then addressed the pros and cons of whether or not European governments should be bailed out by the EU, particularly emphasising the significance of conditions which are generally attached to such bailouts. Sandbu concludes that these bail outs resulted in reciprocal blackmail which created both economic and political uncertainty.

Sandbu left us with some food for thought, speculating about how things might have turned out differently, actually for the better, if the UK was part of the Eurozone throughout and in the aftermath of the crisis.