Europe's Orphan: The Future of the Euro and the Politics of Debt

Sandbu, a Financial Times economics writer, argued against the consensus that the euro's design caused the crisis, holding instead that policy choices made within the monetary union produced the damage and that different choices were available throughout.

His argument attacks the standard account point by point. He accepts that a monetary union constrains adjustment but argues that the constraints were less binding than claimed. On the periphery's competitiveness problem, he argues that internal devaluation through wage and price adjustment was achievable and in fact occurred, and that the greater damage came from demand contraction imposed unnecessarily. On the fiscal position, he argues that the eurozone as a whole had fiscal room and chose not to use it. On debt, his central claim is that restructuring was available at every point and was refused for political reasons: Greek debt should have been restructured in 2010, private bondholders should have taken losses rather than being repaid with official money, and the resulting official debt to European institutions then made restructuring politically impossible.

His most contested position concerns the European Central Bank. He argues that it consistently did less than its mandate permitted, that its 2011 rate increases and its handling of liquidity to Greek and Cypriot banks were policy decisions rather than legal constraints, and that a differently minded central bank would have produced very different outcomes with the same treaties.

The implication is that leaving the euro is not the remedy, because the problem is not the currency but the policy consensus operating within it.

The argument is a serious minority position and Sandbu makes it carefully. Critics respond that a monetary union whose institutions reliably produce bad policy is not meaningfully separable from those institutions, and that his counterfactuals assume political possibilities that did not exist.