The discomfort zone

Europe’s Deadlock: How the Euro Crisis Could be Solved – and Why It Won’t Happen, by David Marsh, Yale, RRP£7.99/$15, 120 pages

The eurozone may have finally emerged from recession but many still wonder whether the currency bloc can survive in its current form. Sceptics contend that flaws in the design of the monetary union – including the lack of a strong fiscal authority and the democratic deficit at the heart of its institutions – are too deep and unlikely to be corrected soon. Optimists, meanwhile, believe that governments are determined to keep the show on the road. They compare the eurozone to a bumblebee, which flies even though it should not.

David Marsh is on the doubtful side of this divide. Marsh, a close observer of European monetary affairs for the Financial Times during the 1980s and early 1990s, now chairs the Official Monetary and Financial Institutions Forum, a think-tank linking central banks with the private sector. His latest book, Europe’s Deadlock, makes a hard-hitting case against “muddled thinking, lack of imagination and straightforward incompetence on the part of the politicians and technocrats charged with policing the single currency”. In Marsh’s view, the euro will survive, “yet deadlock and discord will linger on”.

Marsh believes the problems affecting crisis-hit countries have largely domestic roots. On this point, he is right. Greece lived beyond its means; Italy and Portugal ducked the steps needed to improve their competitiveness; Spain and Ireland chose to ride a property bubble – even though they were handed the rope to hang themselves by complicit creditors in the eurozone core.

But the author seems to subscribe to the idea that devaluation would help crisis-hit countries. Here, the British experience is cautionary: sterling has depreciated substantially over the past year but the UK’s trade deficit remains large. Sinking your currency is no magic recipe for making a fast buck.

The eurozone will only come out of the woods if it marches as a pack: this is the essence of the 10-point plan with which Marsh concludes. Some of his ideas, such as introducing mutually guaranteed “euro­bonds” in exchange for more centralised oversight of member states’ public finances, are sensible and necessary. Others, such as laying down procedures for leaving the eurozone, are harmful. A currency union is only credible if designed to be irreversible.

Most importantly, Marsh’s plan looks too ambitious in the short term. The author would like members to take binding steps to set up a full political union. This may or may not be the final destination of the currency bloc. But, for now, there is no need to take these steps. Strengthening the democratic accountability of existing institutions, such as the European Commission, would be a good start.

Marsh does not believe member states have the will to apply even a watered-down version of his strategy. But his analysis ignores the significant steps that the eurozone is making, for example, on the path to a banking union. These include giving the European Central Bank power to supervise all eurozone lenders, no trivial handover of sovereignty.

Political leaders still have much work to do if they are to sell the European project to their citizens. But Marsh is wrong to assume that voters no longer have any patience with Europe. The great unresolved mystery of the crisis is why no eurosceptic party has gathered sustained momentum. Italy’s Five Star Movement, which campaigned for a referendum on the euro, became the second-largest party in last February’s elections; it has been hammered in all local polls held since. The eurosceptics of Alternative for Germany are not serious contenders in the elections next month and may even fail to enter the Bundestag.

In the absence of a strong, balanced recovery, the risk of a political crisis in the eurozone will remain high. But this is no reason to think that the currency union is doomed. In recent years, many observers jumped to this conclusion. Most have already had to change their minds.

Ferdinando Giugliano is an FT leader writer