Can Europe prosper without the euro? In 2010, the 2008 global financial crisis morphed into the “eurocrisis.” It has not abated. The 19 countries of Europe that share the euro currency―the eurozone―have been rocked by economic stagnation and debt crises. Some countries have been in depression for years while the governing powers of the eurozone have careened from emergency to emergency, most notably in Greece. In The Euro , Nobel Prize–winning economist and best-selling author Joseph E. Stiglitz dismantles the prevailing consensus around what ails Europe, demolishing the champions of austerity while offering a series of plans that can rescue the continent―and the world―from further devastation. Hailed by its architects as a lever that would bring Europe together and promote prosperity, the euro has done the opposite. As Stiglitz persuasively argues, the crises revealed the shortcomings of the euro. Europe’s stagnation and bleak outlook are a direct result of the fundamental challenges in having a diverse group of countries share a common currency―the euro was flawed at birth, with economic integration outpacing political integration. Stiglitz shows how the current structure promotes divergence rather than convergence. The question then is: Can the euro be saved? After laying bare the European Central Bank’s misguided inflation-only mandate and explaining how eurozone policies, especially toward the crisis countries, have further exposed the zone’s flawed design, Stiglitz outlines three possible ways forward: fundamental reforms in the structure of the eurozone and the policies imposed on the member countries; a well-managed end to the single-currency euro experiment; or a bold, new system dubbed the “flexible euro.” With its lessons for globalization in a world economy ever more deeply connected, The Euro is urgent and essential reading.
Joseph Eugene Stiglitz, ForMemRS, FBA, is an American economist and a professor at Columbia University. He is a recipient of the Nobel Memorial Prize in Economic Sciences (2001) and the John Bates Clark Medal (1979). He is also the former Senior Vice President and Chief Economist of the World Bank. He is known for his critical view of the management of globalization, free-market economists (whom he calls "free market fundamentalists") and some international institutions like the International Monetary Fund and the World Bank.
In 2000, Stiglitz founded the Initiative for Policy Dialogue (IPD), a think tank on international development based at Columbia University. Since 2001, he has been a member of the Columbia faculty, and has held the rank of University Professor since 2003. He also chairs the University of Manchester's Brooks World Poverty Institute and is a member of the Pontifical Academy of Social Sciences. Professor Stiglitz is also an honorary professor at Tsinghua University School of Public Policy and Management. Stiglitz is one of the most frequently cited economists in the world.
Working as an English teacher in Spain gives you a certain insight into its economy. Immediately noticeable is the huge demand: seemingly everybody—adults, children, babies, retirees—wants to learn English. Finding work is less than effortless; you need to fend jobs off. The obvious explanation for this is the paucity of the available domestic jobs, and the undesirability of the jobs that do exist, leading many people to seek work elsewhere. More concerning are the large numbers of highly skilled workers who cannot find work. Unemployed doctors, lawyers, computer programmers, and engineers have come to my classes, hoping to improve their chances of getting hired. Added to this, young people in my high school complain bitterly about the prospects of finding a job upon graduating.
Clearly something is amiss. And according to Stiglitz, that something is the euro.
Introduced into circulation in 1999, the euro was the optimistic sign of a coming age of European integration. Nowadays, after a recession, a Greek debt crisis, a Brexit, a refugee crisis, and the resurgence of several nationalist and regionalist parties, things look somewhat less bright in the continent. Unemployment remains high in many parts of the eurozone, especially in the crisis countries—Spain, Portugal, Greece, Ireland—and especially among the young. More than that, the much-anticipated European solidarity and common European identity have largely failed to materialize (or, at least, not nearly to the hoped-for degree). Stiglitz believes that one of the main culprits for these failures is the common currency.
Aside from fostering solidarity, the euro was, of course, expected to aide prosperity. The absence of economic borders, the free movement of labor and goods, and the elimination of conversions and exchange rates was expected to boost the economy and reduce the differences in wealth between countries. But contrary to predictions the economy did not grow notably faster than it had been pre-euro; and after the 2007-8 crisis, the economy sank into a prolonged recession from which is has yet to completely recover.
The explanation for this, according to Stiglitz, is that the introduction of a common currency took away a crucial flexibility—the ability to adjust inflation and interest rates—without replacing it with any compensating institutions. Specifically, this inflexibility makes it more difficult to deal with trade deficits (when a country is importing more than it is exporting). Normally, when there is a trade deficit a country can inflate its currency to correct the imbalance. But when the currency is essential ‘pegged’—leading to a situation similar to a gold-standard—than this adjustment cannot happen, and the deficit can persist long-term.
If a country is buying more foreign products than it is selling, then clearly the money must come from somewhere. If the money comes from banks—borrowing money from abroad and lending it to domestic consumers—then this leaves the country vulnerable to a financial crisis, should too many borrowers demand their money at once. If, conversely, the government absorbs the deficit in the form of debt then this leads to another vulnerability: if the debt mounts so high that investors lose confidence that it can be repaid, then lending might suddenly stop, leading to a debt crisis. And since the debt is, essentially, in a foreign currency—one that cannot be devalued by the country—it will require some sort of foreign assistance to deal with.
Debt and financial crises can easily lead to general economic crises—high unemployment coupled with low aggregate demand—so running a persistent trade deficit is something that most countries would like to avoid. But how? In order to work properly, common currency areas normally require that its member states be sufficiently similar. This is clearly not the case in Europe; and this disparity allows Germany to persistently runs a trade surplus—a surplus that virtually requires other countries to run a deficit (since all surpluses and deficits add to zero).
Indeed, the crafters of the euro were aware of the problem of a too-differentiated economy, which is why they created “convergence criteria” that the countries had to satisfy in order to join the eurozone. Unfortunately, according to Stiglitz, these criteria were poorly conceived, focusing exclusively on currency stability and fiscal deficit (a narrow-minded focus that characterizes the entire project, it seems). It was hoped that the common currency would aide further convergence between the countries; but the reverse has happened. Rather, the common currency has turned some countries into debtors and others into creditors, further dividing their economies.
But the United States is a common currency area that is highly differentiated by state. Why, then, does a common currency work there and not in Europe? Well, for one it is far easier for Americans to move to different states than for Europeans to move to different countries. A Spaniard in Germany is not like a Mainer in New York. And even if people in Europe could easily move from country to country, it would be alarming if, say, Slovenia became depopulated—what would happen to its culture? On the institutional level, Washington has far more funds to spend—either on countercyclical investment, social safety net programs, or bailing out banks—than does Brussels. In short, culturally, linguistically, and institutionally, the United States is far more integrated.
The situation created by the euro, then, left many countries vulnerable to crises. And when a crisis hit—a very big crisis, admittedly not of their own making—the institutions of the eurozone made it much worse than it had to be. As either the government (as in Greece) or the banks (as in Spain) succumbed, the European Troika imposed austerity as conditions of their bailouts. This, of course, led to still further economic recession, since raising taxes and cutting spending is the reverse of what governments ought to do in a downturn. The increased unemployment should, in theory, have led to wage reduction, and thus to decreased prices and increased exports, which would restore the economy to equilibrium. Certain market rigidities, however—such as resistance to wage cuts and a reluctance to lower prices in a downturn—impede this adjustment, leading to a prolonged recession.
This, in a very simplified form, is Stiglitz’s diagnosis of the problem. And behind all of these institutional failings—from the eurozone’s flawed architecture to the incompetent response to the crisis—Stiglitz sees one culprit: neoliberalism, or “market fundamentalism” as he calls it.
But he does not merely set out to criticize. This book is also full of potential solutions, many of which I found quite creative. To correct the trade imbalance, for example, “chits” can be introduced: a type of credit that can be bought and sold, and which allows its possessor to import or export. Controlling the “chit” supply would thus control the deficit or surplus. More prosaically, he suggests common deposit insurance, institutions to invest in small businesses, a broader mandate for the ECB (European Central Bank), large investments in infrastructure and research, a procedure for country-level debt restructuring, and financial reforms to encourage productive investments rather than speculation, to name just a few ideas.
In short, he believes that greater European solidarity—leading to common institutions that focus on a common prosperity—is needed if the euro is to work. And if that is not possible, Stiglitz believes that the cost of exiting the eurozone is less than the cost of remaining inside and pushing doggedly onward. He even provides a detailed plan of action should Greece decide to leave the eurozone. Of course every country need not return to its old currency; there could, for example, be a “northern euro” and a “southern euro.” Merely having Germany leave would go a long way in restoring balance to Europe’s economy.
For such a short and quick read, this book is impressively rich in ideas and penetrating in its analysis. But of course there are shortcomings. While easy enough to read, I found the writing to be stiff and lifeless; the book is written with the impersonal tone of an academic article. More seriously, I fear that many will find the book too partisan—specifically, too leftist—to be convincing. It is intrinsically unsatisfying for Stiglitz to dismiss his theoretical opponents as “market fundamentalists,” since this leads me to wonder why so many people could hold such contrary views about how the economy works. Admittedly, as Stiglitz himself argues, all economic decisions are, at bottom, political decisions, since they are aimed at pushing society in a certain direction. Even so, Stiglitz makes too little of an attempt to reach out to those not of his ideological persuasion.
Though I am far too ignorant to evaluate his economic arguments, I found the book quite convincing. This pains me. Personally I like the euro very much. The ability to use my pocket money in Italy, Ireland, or Germany is extraordinarily convenient. But if the euro leads to a prolonged underperformance in some countries then it must be reformed or replaced. It is, after all, only a currency. The really important issue is European solidarity: the belief that Europeans are stronger together than apart. And when some countries are debtors and some are creditors, and both are economically stagnant, and when voters have little sway over important economic decisions—this is no recipe for harmonious coexistence. The euro was, in any case, only intended to be a halfway house: one step on the road to greater European consolidation. Clearly this process must continue, and must be crafted to ensure prosperity for all. In the meantime, I suppose I’ll just keep on teaching English.
Stiglitz might be a bit too left-leaning for mainstream economic books consumers, and I have to say, I found his style to be a bit on the dry side, especially parts I to III: Europe in Crisis, Flawed from the Start and Misconceived Policies.
Having said that however, the book is demand-side economics at its finest, and it would be a challange for the best of them to find flault in Stigltiz's analysis in these three parts. His critique of neoliberalism and his arguments - that at it's root, the Eurozone's woes were the result of misguided neoliberal ideologies on which the Eurozone's structure was built and that troubles naturally arise when economic integration outpaces political integration - are really insightful. I certainly enjoyed his bashing of market fundamentalism and concepts such as Expansionary Contraction. I feel that these criticisms would play a key role in propelling economic policy debate towards a stronger embrace of the healthy role that big government and fiscal policy can play in the management of the macroeconomy.
I should add however, that his views on the free mobility of labour within the EU and intra-Europe migration might be a tad surprising given his left leanings, but one should note that his critique is that of the relevant policies and their negative consequences rather than the validity of arguing for free mobility.
The best part of the book is saved to last, Part IV: A Way Forwad, and in particular chapter 9 is a must read for all and any who are interested in currency unions and the recent European crises. His key proposals for fixing the Euro include a comprehensive Eurozone banking union, mutilisation of debt, an expanded ECB mandate, and a European Solidarity Fund, all seem sensible and implementable.
I think an offshoot of one of his proposals, the one about establishing mechanisms to direct lending to European SME's comes head to head with the Basel Accord and its tenets of of risk weighing of assets, however, this is in line with modern concepts such as the Credit Surface, and given that family and small businesses play a larger role in Europe than in the US, one would assume that the proportion of SME's in the Credit Surface is larger in Europe than it is in the USA, and by asssigning high risk weighing to lending to SME's, the Basel criteria might be placing a stranglehold on potential growth in Europe by discouraging banks from lending to them and increasing the decoupling of US and EU economies.
His proposals for a flexible Euro, how to make an amicable divorce work, including the introduction of Credit Auctions and Trade Chits might be a bit rough and ready and easily challanged by reality but their uniqueness and novelty gives them value and merits their inclusion.
There are two Joseph Stiglitzes: the brilliant economist and the repetitive polemicist.
Unlike “The Price of Inequality,” a book wrapped by Stiglitz the rambling, Nobel-flashing celebrity blogger around the nucleus of a very incisive article written by Stiglitz the brilliant economist, this forward-planned, structured book is 100% the work of the brilliant economist. To be sure, he is starting to sound a lot like his alter ego, but the transformation is far from complete and what we have here is a genuinely exhaustive, if not amazingly deep, treatise that has a beginning, a middle and an end.
The book is divided in five sections (that are however grouped in four parts):
• First a “you are here” section that lays out the author’s views of where we stand and how we got here • Second, a three-part expo on (i) how currency unions are meant to work, (ii) where the Euro diverges from this ideal and (iii) the (negative) role of the ECB • Third, a long whine against the Troika’s work in Greece and (less so) Ireland • Fourth, the Stiglitz manifesto of how to (semi-centrally, you have been warned!) run an economy, mischievously mis-branded “Creating a Eurozone that works” • Fifth, a daring and provocative “what next” section
A quick read through chapter 9 (the manifesto) may be the best starting point for the reader. Read that and you will calibrate how much to the right you are of the author (or to the left for the 5% of the human population who are thus inclined). Agree or disagree, you are now reading the book with the author’s ideal world in mind and that’s how you will get the most out of it.
The bits I thought were unparalleled in the literature were the section entitled “Internal devaluations and external imbalances” (pp. 97 to 110) that nestles inside the already very strong chapter on “When can a single currency ever work,” the entire chapter on how the ECB was conceived, how it thinks and whom it serves (brilliant, brilliant) and the final section of the book that takes you through how we can go about executing on “more Europe” or “less Europe,” as opposed to muddling through to assured destruction.
That said, the final section will make your stomach turn if you are German, and you will be right to object. If Europe was the only economy on earth, I can see how perhaps Germany could pay its workers more / restrict its trade surplus / whatever. I’m not saying I buy it, I’m just saying I can see it. But it’s competing with Japan, China and South Korea, to say nothing of the US. Not Italy. Not Spain. Not even France any more. Most certainly not Greece. I’d say it has the most luxurious setup for its workers from all of its competitors. Hell, Angie picked up 20% of workers’ wage bills at the depths of the crisis to keep them employed. And the unions have board seats in most major employers, as often does the state. Stiglitz knows all this (and it bothers him when it comes to German companies buying Greek state assets, for example) but is selective about when he remembers it.
Also, the book sets the ambitious goal of explaining that Europe is suffering from poor policy design rather than from having muddled through too long without engaging in structural reform. This the author fails to do, entirely. The treatment of structural reforms is not worthy of a high-school essay.
I won’t even bother going into the arguments, just count the number of pages dedicated to looking at structural reforms and draw your conclusions.
But I’ll cite two examples where the author’s judgement on specifics is almost as awful as his judgement on macroeconomics is brilliant:
1. The author sides with the pharmacists in my country (full disclosure, my mom’s a Greek pharmacist) who are plainly one of many extractive agents in an economy that is full of extractive agents. Suffice it to say Greek pharmacists went on strike, citing the Hipporcratic oath, when the troika threatened to break their stranglehold on baby formula. You heard that right, it was (and may still be, I’ve stopped following) illegal for a supermarket in Greece to sell baby formula. You’ve got to pay up and buy it at the pharmacist. Just an example.
2. The author mentions more than once that George Papandreou was crusading against the press-owning oligarchs. Point of information: George Papandreou was a third-generation prime minister. Both his grandfather George and his father Andreas have served as prime minister, multiple times. Look it up on Wikipedia, some crazy percentage of the time since WWII the prime minister or the head of the opposition in my country was called Papandreou. If you think a political clan can maintain that position and not be in cahoots with the oligarchs you know nothing about Greece. You probably know nothing about planet earth. Or you are blinded a bit by your views, perhaps…
So this book is not without its foibles. Overall, however, it does a tremendous job of laying out a view and it is the only book currently in print that covers so many facets. And it is not afraid to shout from the rooftops that the emperor has no clothes.
It makes excellent background reading for my favorite book on the Euro, the one by the FT’s Martin Sandbu. Sandbu goes deep, and if you want the skinny on his “straw man” you’ve got it right here!
Някои неща разбрах, други не. Въпреки че имам базови познания по макроикономика, част от тезите ми е трудно да проследя. А още по-трудно ми е да ги възпроизведа на разбираем език, като за неспециалисти. Стиглиц подхожда към темата за еврото от своята си политическа лява гледна точка за икономикта, която е позната от другите му книги („Цената на неравенството“, „Голямото разделение“, „Пари и власт“). На моменти е небалансиран, но човекът си има категорични възгледи, опитва се да ги обясни и защити. До колкото схванах, основните проблеми с еврото – според Стиглиц - са следните (в произволен ред): - Еврото е обща валута за държави, чийто икономики са различни по сила – мисля, че това е безспорно. Следователно не може да се очаква фискална политика, което би работила за силната икономика на Германия, да работи също толкова добре за слабата икономика на Гърция, Испания, Португалия (а как ще работи за немощната икономика на България, изобщо не ми се мисли). - Еврото е създадено според определена идеология, която е била актуална през 80-те, но има много емпирични данни, че вече не действа адекватно. Това е т. нар. пазарен фундаментализъм, според който пазарите знаят най-добре и ако са оставени на себе си, ще се саморегулират. Което очевидно не е така и кризата през 2008 го доказа. - Политиката на ЕЦБ, която управлява паричната политика на държавите, използващи евро (и да – ще изгубим финансовия си суверенитет, ако преминем към евро – никой не бива да се съмнява в това. По-важният въпрос е дали тази загуба е добра или лоша за нас, като се има пред вид „капацитетът“ на родните управници) е фокусиране единствено върху поддържане на ниски стойности на инфлацията. И само толкова. Но инфлацията не е единственият важен фактор в една икономика, според Стиглиц дори не е толкова важен, ното толкова страшен. По-важно е да се обръща внимание върху нивото на безработица и разтеж, но това не е в правомощията на банката. - ЕЦБ е независима, т.е нейните управители и чиновници не се демократично избрани, следователно не носят политическа отговорност. А това е проблем, защото взимат политически решения – нивото на инфлацията се отразява на доходите на европейците, а това вече е политика. Освен това банкерите от ЕЦБ са склонни да пазят и да се грижат за финансите, а не за работните места и доходите на хората. Не ги е грижа особено за бездомните, щом кредиторите си получават плащанията навреме. - Липсата на валутни курсове между държави с различни по сила икономики елиминира предпазен клапън, чрез който може да се възстанови разтежът на закъсала икономика. Пониженият курс на дадена валута поевтинява износа и така съответната държава наваксва търговския си дефицит (превишението на вноса над износа). Това съвсем накратко. - Т.нар. спасяване на икономиките в криза – Гърция, Испания, Португалия и Ирландия, според Стиглиц е доста спорно (онзи ден чух един български „експерт“ да казва, че не бива да се съмняваме, че именно ЕС е спасил Гърция). Проблемите са няколко. Първо на тези държави е наложено решението на банкерите, така че демократично избраните правителства не са имали никаква самостоятелност при вземане на решения, засягащи всеки гражданин в тях. Това определено ми се вижда голям принципен проблем. Второ, изпълнението на условието на ЕЦБ за намаляване на дефицитите е увеличило безработицата, намалило е драстично доходите, намалило е инвестициите в обществена инфраструктура, което допълнително забавя бъдещото възстановяване и разтеж на страните в криза. А това е довело до страдания за обикновените хора, които не се отчитат със стойностни показатели. И трето – страните в ЕС вече не са равнопоставени, защото някои са кредитори, а други длъжници. Това е нещо, което отравя отношенията на всички нива и допринася за разделението в ЕС. Гърция си е изпатила особено лошо, дори без да броим правителствените кризи по време на финансовите такива. Стиглиц описва някои от спорните реформи, които според него са довели до смазване на малкия местен бизнес и до отваряне на вратите на държавата за голе��ите западни търговски вериги. Освен това печалбите на тези корпорации не се облагат в Гърция, въпреки, че са натрупани там. По този начин Гърция се лишава от данъчни приходи, което най-малкото е странна мярка, ако говорим, че целта на мерките е повишаване на държавните приходи. Стиглиц с право си задава въпроса това ли е била крайната цел на реформите. Накрая Стиглиц дава няколко рецепти за оздравяване на еврозоната. Те са обичайните му рецепти за оздравяване на икономиките в криза – действия към намаляване на неравенството – това винаги е на първо място, отслабване силата на финансовия сектор, повече демокрация, по-малко финансова власт, която си купува политическа власт. Повече реформи, насочени към намаляване на безработицата и към икономически разтеж, а не такова вманиачаване към дефицитите и инфлацията. Според него еврото не е задължително за просперитета на Европа. Оказва се, че референдумите за приемане на еврото не са чак толкова противозаконни, колкото ги изкарват в България – гражданите на Дания и Швеция са казали „не“ на еврото и това не е довело до никакви санкции или до нещо нечувано страшно. Опитвам се да разбера дебатът, които се води в България, въпреки, че аргументите са предимно емоционални. Сега ще ми трябва книга, която оправдава въвеждането на еврото във всички държави от ЕС. Надявам се тя да вдъхва повече оптимизъм, защото ако се вярва на Стиглиц, а той съвсем не е случаен човек, сме се запътили към икономическа пропаст.
If you can get through the 70% of this book that is a rambling polemic, there is some good stuff here, but you will have to persevere.
On the one hand, Stiglitz presents a clear account of why currency areas don't work without (preferably created first) political and economic union (what Mundell famously posited in 1961 as A Theory of Optimum Currency Areas). The main thrust of Stiglitz's conclusion is that you either need more union (in particular, automatic fiscal transfer) or less union (either separating the Eurozone into two or more currency zones, or dissolving the Euro altogether). What will absolutely not work is for the Euro to continue as it is. That way lies anaemic growth at best for the Eurozone as a whole, with some countries within mired in deep recession possibly for decades whilst they try to claw their way back to competitiveness through enforced wage deflation. Which is agonisingly painful when you are also massively indebted and a huge amount of your tax take is used simply to keep your creditors whole (debtor's prison springs to mind, here). So far, so good. This element of the book works.
On the other hand, Stiglitz is a dyed-in-the-wool advocate of the 'high tax, high spend, government is best' school of thinking and that, really, is what makes this book such a disappointment - ultimately, it just doesn't come across as being very balanced (even if he is, rightly, passionate about the misfortunes now being visited upon Greece). It is also far, far too long.
The problems with this book are many; here are some examples:
1) Stylistically, this book is a pastiche of the "tell them what you're going to say, say it, then say what you've said". In this case, Stiglitz uses this as a lazy device to pad out the plot in a way that is unjustified by the actual content. He loves to refer back to what he has 'proved' in previous chapters when really what he has done is attempt to browbeat the reader into submission by writing at sufficient length that the reader hopefully won't spot the thinness of many of the arguments.
2) I really object when an author refers to things having been conclusively demonstrated (or some such like expression) with a footnote reference that directs you to a citation that is a previous article written by themself. This book is simply awash with self-referential praise. The real problem here is that Stiglitz's use of this device ultimately gets in the way of the core themes of the book (why couldn't he have stuck to these?): that a single currency won't work without political and economic union (oops, repeating myself there); that it has caused the crashes in the peripheral countries; and that once you're bust (Greece, especially), you can't resuscitate yourself without significant debt forgiveness (for the avoidance of doubt, these are themes with which I think Stiglitz is spot on).
3) Stiglitz lets his political views overwhelm what would otherwise be considered a cogent explanation of the problems in the Eurozone. The challenge, I think, is that Stiglitz will leave no opportunity unpassed to declare the free market terminally defective, so justifying extensive 'tax 'n spend' government. His solution for Greece is essentially for the government, after a massive debt write-off, to take control with full-on government-led, demand-side, reflation. The problem is that Stiglitz gives no indication of where his version of government intervention would stop. Or perhaps, that's the point: it wouldn't. Yet we know where command economics has led - if you're looking to score the free market vs the command economy (avoiding the use of socialism, because that would be a bit too pejorative), command economics hasn't really fared too well in the long run. Put another way, there really aren't too many serious economists left in the world (or anyone, for that matter, besides dictators and oligarchs), who can mount any convincing arguments for full on government-led control of 'tax 'n spend'. This includes promoting what Stiglitz ominously describes as spending in areas like basic research because the market just can't be trusted to invest enough of this if left to its own devices. Perhaps Stiglitz is thinking of the Soviet Union's fabulous track record of resource allocation to its automotive industry? Or doesn't this matter, so long as people have jobs, whatever their nature? While Stiglitz does have a point when he decries the huge disparity in wealth in a modern capitalist world, you can't help thinking that his preferred solution is not to have a free market at all, but he knows he can't say that, because it would be universally shot down). So, what we end up with is a politically biased false syllogism of the first order:
a) the Euro has caused the economic collapse of some countries in the Eurozone and created huge economic disparities as a result (I'll buy that); b) free market economics leads to disparities in wealth (I'll buy that too); therefore... c) the failure of the Euro is a failure of free-market economics (that's arguable), so... d) what you need is for more government control over just about everything until it's all sorted out, including the restoration of a more fairly shared economic cake (nope - not buying that).
I think Stiglitz's underlying premise is both simpler and easier to understand and I'll repeat it for the third time: monetary unions don't work without political and economic union; you have to have the former in order to have automatic fiscal transfer which is a fundamental construct of the latter. And if you do set up a monetary union without these and you end up like the Eurozone, trying to deflate your way back to competitiveness, it won't work without significant debt write-downs.
In summary, if Stiglitz really wanted to make this book work, he would have had the courage to state clearly what he thinks:
a) is the right steady state balance between the state and the private sector; b) is in scope for an enhanced government-led solution and, as importantly, what he would leave to the market to fix (what does he think is the right balance between automatic stabilisation and active intervention and why?); c) is the length of time his enhanced solution would need to be in place; and d) is the measure of success for his solution (critically, what does he actually mean by fairness? A uniformly divided 'cake', or do some people still merit a bigger slice than others? Could we have some numbers with supporting evidence, please, rather than grandiloquent statements).
Of course, Stiglitz doesn't provide any of this; rather we get an enormous dose of polemic claptrap.
4) It's at this point that I should perhaps declare my interest: I spend a lot of time working in Government and I can only say that Stiglitz's faith in government to run the 'market' is touchingly naïve. He seems not to understand that government is made up of individual people, most of who behave in exactly the same way as those people whom he so despises who are in the 'market'. Amusingly, he cites 'confirmation bias' as the reason for why so many Euro decision-makers have persisted in making so many bad decisions, yet in his faith in the power of government to achieve economic prosperity for all, he is just as blind to his own confirmation bias.
A few other things:
5) The book rightly picks up on Mundell's seminal work on Optimal Currency Areas. Stiglitz's analysis would have been much more interesting if he had looked at the conditions for a currency area per se and not just used the other most well-trodden examples - the USA (which has broadly worked) and the Gold Standard (which failed). What I mean here is that rather than looking at how large a currency area might be, he should start with how small a currency area can be. So, for example, what makes London a currency area? Or the South East of England, or the UK? The fact is, no-one ever really challenges whether a sovereign state is an optimal currency area and an explanation of why that is (generally) the case (is Italy an exception?) would have made the book much better grounded. The problem is, that sort of analysis would not have fitted at all well with the political narrative of the book, which was all about proving that the free market doesn't work. It feels to me like lazy thinking.
6) It's all the fault of those nasty Germans for trying to be productive (Stiglitz calls this running trade surpluses) while the poor Greeks are simply victims who have done nothing wrong. The truth, I'm sure, is a bit more nuanced than that, but why let this get in the way of a good story? No mention, of course, of the Greek's allegedly challenged tax system.
7) Almost no mention of the UK. Stiglitz declares 'austerity' as dead and buried and a solution to over-indebtedness that cannot work ("Austerity is contractionary"). Which is interesting insofar as that is exactly the approach the UK has deployed for the last six years, during which time we have seen continuous growth (the triple dip was revised back to a single dip), a declining public sector debt growth rate, whilst also transferring a massive number of jobs from the public to the private sector and what is now (in recent times) record employment and very low (4.9% in August 2016) unemployment (economically, we can't be far off full employment). So why, exactly, has austerity failed? Stiglitz loves to talk about counterfactuals; it seems to me that he is somewhat selective in the ones he chooses. He does manage to contradict himself on pages 335 and 344 where he describes the UK as having a long term unemployment problem (1.2%, I think, in August 2016) and then says the UK is a high employment economy. As an alternative, he might try to make the case that a) austerity in the UK is not all it seems (Paul Krugman has elaborated on this in April 2015); b) that the UK would have achieved higher sustainable growth had it not had austerity and c) that the austerity that has been applied has led to a more unequal sharing of the economic cake than had it not been applied. Then we would have a real debate, especially if he could cite examples where government investment has generated genuinely sustainable growth.
Personally, I find the ‘austerity is dead’ claim just a bit too simplistic. Interestingly, Krugman’s 2015 analysis stops in 2013 when Germany was showing higher growth than the UK and since Germany wasn’t applying austerity, QED, austerity doesn’t work. Yet, in a low interest and low inflation environment (where we are still benefiting from imported Chinese deflation), it is self-evident that increased public sector spending will lead to increased growth. What Krugman doesn’t show and what Stiglitz doesn’t talk about is what has happened since 2013 in the UK and Germany, where I believe the UK’s growth has increased (whilst the debt growth rate has continued to come down) while Germany’s growth has stagnated. Make of this what you will.
Much more interesting, I think, would be an analysis of what Stiglitz’s proposed spending actually buys you. The problem is that, in the UK at least, we kept on shovelling money into the public sector while the sun was shining, without stopping to check whether we were actually getting value for money back again; I say this not because I think that public sector spending is wrong, per se, rather that much of the money was lavished on services and projects that were woefully inefficient (effectively, much of our much trumpeted growth in the run up to 2008 was basically 'borrowed'). And that, I’m afraid, is simply a manifestation of governments’ generally poor track record everywhere both to allocate resources wisely and, when they do, to hold the recipients to account for the money to be spent efficiently. Call me old fashioned, but who gave the government a license to waste my money? In the Stiglitzian world, all of this is simply ignored because it is more important to have growth when growth can buy equality and government spending can buy you growth. In this world, mountains of debt don’t really matter because low inflation and hence low interest rates are here to stay for ever. And Governments are somehow infallibly capable of cost-free efficient resource allocation. Let’s keep those hopes.
8) No mention of the one great example of a currency union of modern times besides the Euro - that of West and East Germany. In this case, parity was achieved through exactly the classical medicine Stiglitz alludes to elsewhere - political and fiscal union to accompany the single currency and an eye watering amount of fiscal transfer (something approaching $1.7 trillion, with $70bn still being transferred every year for nearly another decade...or something like that). With numbers like that, is it really any surprise that Germany doesn't want to bankroll the rest of Europe through fiscal transfer? They've done it once and once is enough! Again, it's a pity that Stiglitz didn't use this readily available case study (I won't call it a counterfactual, because it doesn't really support Stiglitz's arguments).
9) When Stiglitz talks of the need to write off massive amounts of debt, he claims this hasn't happened because the political establishment is (I paraphrase) in the pockets of the financial sector. This is just too simplistic, because there is no pain free solution here. Not one mention of 'contagion' being the reason why Greece hasn't been let off the hook - surely this deserved some discussion? Unfortunately, many financial services institutions are both publicly listed and in the top 100 of their respective stock exchanges, which means they have to be held in many tracker funds which, in turn, form the basis of many people's savings and pensions. A wholesale debt write-down causes losses to the banks, which hits their shares and so on. So, all debt write-down does is to cause a transfer of the economic pain from one set of people (for example, Greek citizens) to another set of people (which may include Greeks with private sector pensions). This book would have been much more convincing if Stizlitz had addressed this issue and also set out his personal belief (if he thinks one party or another should bear more pain, then so be it - he should at least address the issue in the first place).
10) Stiglitz tells us that credit creation cannot be left in the hands of a discredited private sector (regulated by authorities who are in hock to the private sector). His solution is to give credit creation to the public sector. As if the public sector hasn't been utterly discredited in this arena too! But then again, in the Stiglitzian universe, the government is perfect.
11) Somewhere in the book, Stiglitz states that it is the purpose of banks to create jobs. Really? You could write a book on this statement alone. Here, it is simply glib. Or just a part of the political narrative, which you either get, or you don't. I think it shows yet more incredibly lazy thinking.
12) Just what does Stiglitz define as inequality, or what his 'command 'n control' government will attempt to achieve? One suspects that there is no answer to this in a Stiglitzian world, because there is always more levelling to be done. Of course, to create a level playing field, you also have to explain the consequences of this on behavioural incentives, which really forces you to start setting out what are your criteria for fairness. Which surely requires deeper analysis than Germany: BAD! Greece: poor Greeks. A pity he didn't think it worth exploring this topic, as it would have helped to ground the book. And reflect what most people think: that Greece should never have joined the Euro (through no fault of their own, they misled themselves about their national statistics etc) and that they do bear some responsibility for where they are now (it may not be a lot, but it is not zero!).
13) And in his efforts to make sure that the new world economy does nothing unethical, will Stiglitz be the one to tell the Greeks that they must now shut down their tobacco industry? I mean, it's only another few thousand job losses and millions of dollars of tax revenue - a rounding difference really.
14) Finally, as others have pointed out, the Euro was the creation of Jacques Delors. Hardly the poster child for neo-classical liberalism. Oh well.
A book for students of economics...hmmm. I'm glad I didn't read this when I studied economics at university over 20 years ago (and yes, I did write my dissertation on the Euro). I was, frankly, still very green, but I think I would have spotted this treatise for what it is - some good economics smothered with political polemic.
This is an absolutely fascinating book that delves into the Euro and all the issues surround it and, according to Stiglitz, have encompassed the currency since day one.
I know it doesn't sound like it, but this was an easy read. I've read one other book by Stiglitz and numerous articles/excerpts and none have disappointed. Here he writes in an intelligent, well thought out language but in an accessible way for someone who, like myself, is not an expert in the Euro and/or economics. I wouldn't be intimated by the book because he wrote this book for mass consumption rather than an academic audience.
The title reads a little depressing and hopeless, but Stiglitz states that the Euro and Eurozone can be saved. He discusses the initial flaws in the system, the 2008 crisis, post-2008 recovery (or really lack thereof), a comparison to the U.S. in the 2008 crisis and recovery, as well as the current situation. He provides a lot of information but I felt that I could digest it all. His suggestions to save the Euro is interesting and appears to require major structural changes. It'll be interesting to see what the Eurozone countries and the EU choose to do.
If the subject interests you, I definitely recommend it!
Argh, I fooled myself again with a Stiglitz book. Only after getting it and going a bit through it did the deja-vu hit me to remember just how much I disliked the previous one. The subject matter was so interesting to me that I might've gotten it anyway... but yeah, this one was a pain to go through. The boredom of some plane trips helped, though only to some extent as the problem I found with the book was not bad presentation or anything like that, just a particularly devious agenda hidden behind otherwise quite smart rhetoric. Seemed to me like the author from beginning to end praised his own generous heart (with other people's money) while condemning the unfeelingness of others (he invents names I haven't heard these describe themselves by such as "market fundamentalists".
It is quite ironic (and illogical) how he keeps arguing he wants to help the poor when as far as I could see the main-main message of his book was that he'd like to give governments more power so they can weaken/dilute the money... an act which logically and AFAIK historically tends to hurt in particular the poor to whom thus basic necessities become more expensive, while helping the big players who can afford to run continuous debts like governments and state favored corporations and of course the banking sector which serves to enable the governments' "generosity".
Random memories from the book: - the idea how interestingly enough to the southern EU countries the Euro acted with the budgetary constraints of hard currency, which as we know the big spenders don't like
- the more he criticized the ECB in comparison to the FED the more I was happy to be long term in the EU as the criticism was based on the fact that the FED has a dual-mandate, inflation and employment while the ECB just inflation. In fact, of course, that has been eroded a lot, but that together with the more parties involved I think long term gives it a statistical advantage for the population that in the next crisis they won't just print like hell to "solve all problems"... thin hope, of course, but maybe still slightly better
- among the devious agenda of the author he does put out there some interesting stats about different countries and events. I wholly disagree with his implied causation, but data is always nice
- something really made sense when in the acknowledgements he mentions Krugman as an influence, while I find much more rational and plausible the perspective of Tom Woods and Bob Murphy in the entertaining episodes of the "Contra Krugman" podcast
- overall I got the impression that Stiglitz has found himself a great niche as the economist "defender" of the spender nations providing "economic" justification for the statist powergrabbing moves they wanted to make anyway. That must be a pretty big spot with quite some nice profits coming. Of course he I'm sure would argue he does it all out of the goodness of his heart/mind, unlike the evil corporate people who do it for profits. I can understand both side's motivations and don't blame them for that, but profits/generosity of course are no substitute for reason.
- he invents and uses quite skillfully (from a propaganda/PR perspective) terms such as "blame the victims" to attack his intellectual opponents, while he himself constantly blaming the creditors for the spend-happiness of the debtors, and envisioning a government (as advised by him, of course) solution to protect the "victims" from their own foolishness.
- a lot of criticism of the whole Euro project, stuff I actually agree with, I mean how Europe has been going down, I just happen to disagree on the causation and the solutions the proposes.
- he constantly advocates devaluation of the currency and criticizes what he calls "internal devaluation". Through this he takes the morally manipulative position that people are stupid and should be kept in ignorance by their leaders, that they can be endlessly tricked, because they wouldn't be by themselves capable of realizing they're living beyond their means so the politicians (in order to stay in power) should keep selling the lie that they're just as rich and are okay all the while impoverishing them, so that things can run "smoothly" (eg. with no danger to those in power)
- he still loves the word "regulations"... by which as Mises might put it he of course means the regulations HE proposes, not the many other types that others might, the usual problem with a centrally planned economy: everybody likes it, but everybody envisions his own plans taking precedence over the others'
- in his repeated support of more regulation he never really addresses the idea-killing problems of the fact that regulators are not impersonal objective all knowing gods but rather either come from the fields being regulated or know too little about them, either way resulting in serious problems
- like many he keeps talking about government "investments", and he makes it imply that they're just as good as private ones, that despite the long horrible historical track record and even more generally the logically predictable incentive problems. For some reason he seems to continuously assume that government can be as responsible in "investing" without the profit method of giving them feedback for calculation of weather they're doing a good or wasteful thing. Seems quite unrealistic to assume that they can thus take decisions not just matching but even competitive with investors which actually have personal skin in the game, thus being strongly and personally incentivized to avoid waste and pride driven projects and to strive for profitable projects (eg. actually useful to consumers, eg. people). Instead this "investment" rhetoric is a great fuel for politicians to encourage their own vote winning pet projects neglecting that they're the parasites siphoning off useful resources for political waste purposes so they can stay/be in power.
All in all the book annoyed me from beginning to end, taking an aura of moral superiority all the while doing some very diabolic mental juggling to play a devil's advocate for the powers that be to exercise more control over the lives of people. I found it all not just morally but intellectually dishonest and rationally inconsistent, the kind of juggling that only very smart people can do while throwing around all sorts of selective data & statistics for the aura of realism. In the future hopefully I'll do a better job at avoiding future Stiglitz books... though I did appreciate him for tackling this interesting subject matter and I'm looking for more books on it.
One of the rare books that I chose carefully and did not like. Two main issues. a) too many pages spent repeating ad nauseum that the euro is bad for Europe instead of cogently arguing the case. b) failure to provide a comprehensive picture by presenting the for-euro arguments and then debunking them.
“É espantoso como a Troika não foi capaz de convencer os cidadãos da Grécia, de Portugal e de Espanha das virtudes das suas políticas. (...). Na circunstância em causa, os cidadãos gregos, espanhóis e portugueses parecem ter melhores noções de economia do que o ministro das Finanças alemão ou Troika”.
Compraz-me saber que um reputadíssimo economista, detentor de um prémio Nobel na área, confirme aquilo que muitos de nós intuíamos mais do que poderíamos saber por virtude de não sermos economistas: que efectivamente as medidas impostas aos países resgatados não só eram contra-intuitivas-que tipo estranho de credores é o que empurra os seus devedores para o descalabro financeiro que seguramente não lhes permitirá pagar o que devem?! -como eram realmente aquilo que pareciam - injustamente sancionatórias e implementadoras de uma ideologia política, numa lógica ostensivamente anti-democrática e reveladora da ausência de um fundamento basilar da UE: a solidariedade entre povos.
Sinto-me, agora sim, continuando leiga na matéria e na qualidade de cidadã portuguesa, detentora de melhores noções de economia do que o Schäuble, o FMI, a CC e o BCE, todos juntos.
Por certo tenho que serei possuidora de mais profundos e genuínos sentimentos de solidariedade pelos demais cidadãos europeus e de noção de responsabilidade social do que as entidades acima referidas.
Joseph Stiglitz is in the pantheon of twentieth century economists—a superlative academic who earned the Nobel Prize in Economics, a top-level practitioner who served as chief economist for the World Bank. Stiglitz has taken and successfully defended positions outside the mainstream, including effective criticism of the concept and implementation of free trade—the bulwark of modern international trade policy. This is all to say that when Stiglitz speaks, we should listen.
His 2016 book The Euro: How a Common Currency Threatens the Future of Europe addresses the current economic malaise in Europe and the role played by the 1999 creation of a common currency—the Euro—to replace the fourteen different currencies that had long existed in the new euro-zone countries; that number has increased to twenty-two. This made the Euro-zone a Common Currency Area (CCA), just like the United States where we once had different currencies issued by both states and individual banks.
All in all, this is a book worth reading if you are interested in the consequences of the Euro for European health and welfare. An unattractive aspect is Stiglitz's animus toward important European economic institutions, particularly the EU and the European Central Bank, that promoted austerity as an answer to financial distress. It's not that the criticisms are unwarranted; my problem with it is that its too strident.
Stiglitz asks why has the U. S. experienced such economic growth under a common currency while Europe has stagnated since the Euro’s introduction. He lays much of the blame on the failure to adopt the legal, political, and institutional arrangements necessary to a successful CCA. He also "credits" the “neoliberal” philosophy that markets always work, a philosophy that demands austerity when a country’s finances become unstable, and the sheer politics of the Euro-zone. These issues are all neatly addressed in his book. Stiglitz's take is political as well as economic; he will probably appeal to the left end of the spectrum. This is not a warning--being left doesn't mean being wrong; but it is an FYI.
This review will focus on the differences between European and U.S. economic and legal institutions, on the necessary conditions for a Common Currency Area (CCA) to work, and on the absence of those conditions in Europe. The details of the actual experience with the Euro are well covered by Stiglitz.
Success of a CCA in the "Long Run"
It’s a given in economic theory that a CCA is always successful in the “long run” when there is “convergence,” that is, when all the member states are growing at similar rates with similar inflation rates, unemployment rates and other underlying conditions; here "convergence" means full employment and a general equilibrium. Regrettably, convergence occurs only in “long run equilibrium,” a condition seen rarely—if ever. The notion of long-run equilibrium identifies a tendency of an economy—a tendency to move toward that position. It does not identify the actual position of an economy. In fact, no economy is ever at its long run equilibrium—economies are always away from it even though they might have internal forces that move them toward it. A failure of modern economics is its neglect of the "disequilibrium" that we observe every day and its overemphasis on the "equilibrium" that we never see.
So the notion of long run equilibrium is of little use is assessing the consequences of a CCA. To see this, we first consider how international economies are linked in a multiple currency world (MCA), as in the pre-Euro Europe.
Economic Adjustment in a Multiple Currency Area (MCA)
The fundamental problem posed for any regional or world economy is instability in the relative positions of the separate economies, that is, some economies expanding rapidly or experiencing (say) inflationary pressures while others stagnate and experience deflationary pressures. If this is a world of multiple currencies--an MCA--then divergence among economies can be moderated by the adoption of consistent governmental policies: own monetary policies, wage and labor market policies, international trade policies, and fiscal policies. In adition, there are natural forces that will moderate divergence, examples are flexible exchange rates or the flexibility of wages and prices..
For example, if Spain is in depression with high relative unemployment and falling relative wage rates and prices, while France is experiencing a boom with low relative unemployment and rising wages and prices, there will be a natural shift in the international trade mix: France will buy more Spanish products because they are now relatively cheaper, so French imports (= Spanish exports) will increase; similarly French exports (= Spanish imports) will fall because they are now more expensive. This shift in demand toward Spanish goods moves both economies toward convergence—both the French boom and the Spanish depression moderate.
If the two countries have formed an MCA the foreign currency markets will assist this convergence: the peseta will appreciate relative to the franc because now demand has shifted toward the pesos needed to buy Spanish goods and away from francs that the Spanish need to buy French goods; the movement of exchange rates assists convergence as it further promotes French imports from Spain and discourages Spanish imports from Germany.
In an MCA world the move toward convergence can also be assisted by domestic monetary policies at each nation’s central bank: France can raise interest rates to reduce domestic demand for its own goods; Spain can reduce interest rates to encourage domestic demand for its goods. The net demand for pesetas, hence the peseta/franc exchange rate, will rise and the peseta's appreciation will cheapen Spanish exports and make French exports pricier; the result is a shift in demand toward Spanish goods.
Another governmental policy option is fiscal policy: France can (say) raise domestic taxes to tamp down demand for Spanish goods, using the additional tax revenues to retire government debt while keeping its spending unchanged; Spain can reduce taxes to increase demand for its goods, issuing government debt to pay for government spending. The point is that with separate currencies there are both natural forces (shifts in patterns of international trade, exchange rate adjustments) and policies (monetary and fiscal policies) that can reduce divergence and induce convergence.
Yet another policy response is international trade policy (tariffs, quotas, subsidies). The Spanish government might subsidize French purchases of Spanish goods, making Spanish goods cheaper and promoting increased production in Spain to encourage hiring and reduce unemployment; the French government might tax exports of French goods, thereby making them more expensive in Spain and taking some heat out of the French economy.
The major point is that in an MCA there are domestic policies available to governments to assist movement from divergence to convergence, that is, to correct international trade imbalances that are unsustainable.
Economic Adjustment in a Common Currency Area (CCA)
In contrast, in a CCA these government policy options are severely restricted, if not completely eliminated. Suppose that Spain and France form a CCA by substituting a single currency called the Fraso for the peseta and franc. All the natural mechanisms of adjustment described above are then unavailable: the exchange rate mechanism is now unavailable because a Fraso is a Fraso wherever it is, the exchange rate between the French and Spanish currencies always set at 1:1. This means that the prices of similar goods(in Frasos) must be the same in both countries and, therefore inflation rates must also be the same: a bottle of wine (assumed to be identical in France and Germany; I know!) must have the same Fraso price in each country. Any discrepancies between Fraso prices of wine are ephemeral—they will be quickly eliminated by arbitrage as wine is bought in the cheap country and sold to the expensive country.
Monetary policy is also unavailable in a CCA because interest rates will be the same in both countries: a loan in Frasos in Spain is equivalent to a loan in Frasos in France, so it must carry the same terms. If not, arbitrage will quickly ensure that the two are equalized: loans will be made in the highest-rate country and not made in the lowest-rate country, bringing interest rates to equality. In short, a CCA eliminates monetary policy and exchange rate policies—there are fewer arrows in the quiver of economic policies. Note that this is one of the serious shortcomings of any CCA from the International Gold Standard of the late 19th and early 20th centuries to the Gold Exchange Standard that replace the Gold Standard in the mid-20th century: a CCA supplants monetary policy and other policies as ways of fighting internal booms and busts. In an historical context, Stiglitz notes that William Jennings Bryan was on the mark when he gave his “Cross of Gold” speech during the 1896 Presidential campaign.
So what policies options are left to induce convergence? The answer is government international trade policy or fiscal policies, but these have their own problems. Trade policy, like taxes or subsidies on exports and imports, might be useful, just as trade policies continued to exist in the U.S. after the U. S. dollar was created—states still taxed or subsidized imports and exports. But the rationale of a CCA is that it reduces impediments to trade, in part by eliminating uncertainty about future exchange rates. Trade policies conflict with that goal by adding impediments to trade and by creating uncertainty about future tariff rates. Furthermore, they can easily fail because of competitive reactions by the other nations that adopt offsetting trade policies.
All that is left is fiscal policy—changes in government spending, taxation, and debt issuance—as a viable instrument to use to assist convergence. If each nation is sovereign in its tax and spending policies, independent fiscal policies can be used. But this is a two-edged sword: the use of fiscal policy can moderate divergence, but it can also exacerbate it. If Spain encourages demand by a combination of tax cuts and spending increases—issuing debt to cover the gap—while France does the opposite, it would assist convergence. But if, as happened in Greece, the adoption of the Euro creates better access to international loans and the government uses that to borrow and increase its “nonproductive” spending—wage subsidies, increased worker benefits, and so on—then fiscal policy can be misused to create divergence. Indeed, when the Euro-zone was formed trust in fiscal policy management seemed low—the rules of the Euro-zone prohibited any country from running a government deficit (excess of spending over tax receipts) equal to more than three percent of its GDP except as an emergency measure. Countries like Greece quickly found “emergencies” and flagrantly violated the rule; indeed, no Euro-zone country adhered to the rule except Ireland and Spain.
The Requirements of a Successful CCA
So what will make a CCA work as well as it does in the U.S. where the only currency is the U.S. dollar and individual state currencies are long gone? The answer is an institutional and political framework that establishes appropriate binding rules, and underlying economic conditions that support convergence.
One is an open-border policy in all CCA countries, designed to take advantage of labor market mobility, that is, workers in each country must be able and willing to relocate to where the jobs are: workers in Spain will relocate to France if Spain is in a bust and France is in a boom. This will shift the supply of products from Spain, where there is insufficient demand, to France where there is insufficient supply. Of course, mobility of capital (meaning machines and related overhead items) will help, but in the absence of capital export or capital import restrictions capital is already very mobile—the money required to relocate factories and equipment can be readily found.
The U. S. does not have complete mobility of either capital or labor—people want to stay in their communities and are loath to relocate for jobs; still, labor and capital are sufficiently mobile, though it still takes time to transfer both from one state to another. In the U. S. labor mobility has been assisted by a common language and by open-border policies. Europe, on the other hand, even with its open borders under the Schengen Agreement (which excludes the UK and Ireland), has had less labor mobility than the U. S.; much of this is due to differences in language, education, and customs. This has not been on the plus side for the Euro-zone—while people can travel easily across borders, too many workers tend not to be so flexible.
Still another helpful institutional arrangement is a system for internal redistribution within the CCA to address imbalances—France in a boom shifts money to Spain to mitigate its bust; it can do this via lending or simple transfers (gifts). This calls for political union, creation of a central government that can tax some countries and subsidize others. Another institutional arrangement that helps convergence is a common system of laws about labor markets, security markets, property rights, and other economic choices. The creation of common laws assists in factor mobility by ensuring that relocation does not mean a total disruption of methods and practices, and by reducing the costs of resource transfers.
In the U. S. there is political union in the form of a federal government that collects taxes from all states and uses a portion as long-term assistance to states, and another portion as assistance to states in temporary need. It also establishes laws by which each state must abide. But in Europe there is no such institution—each country continues as a sovereign nation with its own fiscal policies and laws, though subject to some limits. Each government maintains its own taxation and spending, its own laws (for the most part), and its own control over the distribution of aid to other nations. Furthermore, the rules are widely ignored—the later example of restrictions on budget deficits is sufficient evidence.
The absence of any political union has been apparent in the way the “southern European” countries, the PIGS (Portugal, Italy, Greece, and Spain—often accompanied by the clearly northern country of Ireland) have sunk low. Each had a slightly different situation, but most of the high interest rate countries took advantage of the new Euro's effect on convergence of interest rates to exploit public borrowing up to the point where their credit worthiness was damaged, new loans to refinance debt became scarce, and defaults loomed likely. Whether that borrowing was private (Spain and Ireland) or public (Greece) is of secondary importance--interest rate convergence created divergence across economies. With no political union the Euro-zone’s only recourse to assist the PIGS was to solicit donations from member countries or to engage in additional lending to allow the PIGS to repay old debt with new debt. The only sources of those loans and donations were the richer Eurozone countries and the European Central Bank. The public display of self-protection by these entities—particularly Germany, the main instigator of the Euro—was an unseemly display.
Introducing the Euro: The Transition
The Euro, long a European dream, was approved by the 1992 Mastricht Treaty and created on December 31, 1998 when the currencies of each of the fourteen original members were fixed to the new currency called the Euro; this was a "virtual" currency (a unit of account used to price things but not to pay for them; payments were made in the individual currencies). The physical Euro was not issued until 2002, when the individual currencies were retired.
The transition to a common currency depends in part on the initial exchange rates incorporated in the common currency; if they are wrong, the start will have problems. At its inception the exchange rates were determined by the close of currency markets on December 31, 1998. For example, at year-end 1998 the French and Spanish exchange rates relative to the mark were 3.3539 francs per mark and 85.0718 pesetas per mark; the peseta/franc exchange rate was, therefore, 25.265 pesetas per franc. This calculation was made for each of the 13 non-German nations, and the resulting Euro exchange rates were 1.95583 German marks per Euro, 6.55957 French francs per Euro, 166.386 Spanish pesetas per Euro, and so on for each Euro-zone country. These exchange rates were built into the Euro at the outset and they remained in effect forever after. This meant that any future changes in exchange rates that would have occurred could not, forcing economic adjustments to be made via the few remaining policies available to the governments--especially depression of wages and prices in the resulting weak economies.
If those exchange rates had reflected the proper long-run relationships between the currencies the starting point of the Euro would have been propitious. But it appears that this was not the case: The German mark and French franc were undervalued relative to the other countries. This promoted a boom in German and French production to meet increased demand for their export goods from the rest of the Euro-zone, and it created a corresponding weakness in the other economies. The separation between the "northern" and "southern" European economies began and the income distribution across Euro-zone countries widened. In short, the transition to a Euro created rather than mitigated divergence. That Germany and France were the main instigators and managers of the Euro might have been mere coincidence.
RATING SYSTEM: 5 = I would certainly read another work by this author 4 = I would probably read another work by this author 3 = I might read another work by this author 2 = I probably would NOT read another work by this author 1 = Never! Never! Never!
In 1957 Belgium, France, Italy, Luxemburg, the Netherlands and West-Germany decided to found the European Economic Community (EEC), which basically integrated these economies into one bigger economy – with the same rules and regulations, standards, etc. The historical background of two World Wars, a traumatic Great Depression, and a new Cold War brought these western countries together, of course cheered on by the Americans – who saw this as a stronger bulwark against Soviet influence in Europe.
Over the years, more countries became connected to the EEC in one form or another. Then, in the early nineties, communism was discredited and the Soviet Union basically destroyed. East-Germany already had liberated itself in 1989. The European question basically became: What to do with Germany?
In 1992, the European Union was founded at the Treat of Maastricht, which basically meant that 12 prominent European countries decided to integrate themselves into one political and economic area. This decision has to be interpreted against the historical horizon of the fall of communism, the all-encompassing preaching of neoliberalism and the then incumbent globalization of the nineties.
To tackle the Germany question, German chancellor Kohl and French president Mitterand struck a deal that would engulf all European countries in a disastrous flood of events in the decades to come: Germany would give up its currency (the Mark) to ensure its economy would be integrated into a broader European community and thus hinder any new German nationalism threatening world peace – and in doing so, France would allow the German reunification process to proceed.
In Maastricht, the foundations of the Eurozone were laid down. In 1998 the European Central Bank (ECB) was institutionalized and in 1999 a deal was struck with all the countries involved that in 2002 they would introduce their common currency, the Euro.
This, in general is the short history which is crucial to understand in order to pick up Joseph Stiglitz’s pessimistic message about the Euro.
It all boils down to the fact that in the period 2008-2015 – the era of the Great Recession and the disastrous and dangerously harmful policies of the ECB – 19 countries, each with a different political and economic structure and cultural-historical context, had to apply one political-economic policy.
Stiglitz is wise to emphasize the political and ideological aspects of the ‘economic’ policies of the ECB, and he convincingly argues how the neoliberal doctrines of the late eighties/early nineties (the era when the core ideas about and the political foundations of a common European currency were formed) are sold to the public as economic necessities and politically neutral assumptions.
His main line of thought is easy to understand. A country is defined by its borders and its currency. Within its territory everyone pays with the same currency, which itself is under political control (central banks). Since the country itself is related to the other economies (mostly those of its neighbouring countries), the value of the currency fluctuates over time, offering the central bank policy tools to influence the economy. When economic hardship befalls the country, the currency is devalued, making it more attractive to investors to invest capital in the country – in relation to more expensive countries! – which then leads to economic recovery. Economic growth will thus kick in, until the value of the currency becomes too expensive in relation to other countries, which then leads investors to look for other options. Thus is established a fluctuation around some sort of economic equilibrium.
A country can grow economically by investing in its economic infrastructure, political stability through social cohesion, etc. etc. This makes it more attractive for investors to produce in these countries. Crucially, the values underlying political and economic structures in different countries differ from each other – e.g. some countries emphasize economic liberties, while others stress the need for redistribution of wealth.
The Euro has destroyed this mechanism by which governments can control their economic future. The Euro also has destroyed the democratic process by which economic policies can be adjusted through elections and political involvement of civilians. But above all, the Euro has shoved neoliberalism down the throats of all countries involved in the Eurozone.
This was most visible in the economic crisis of 2008, and the subsequent Eurocrisis in 2010, when the banking system was on the verge of collapse and Eurozone countries like Ireland, Greece, Spain and Portugal were on the verge of bankruptcy. The ECB decided, together with the IMF and the European Commission – note the authoritarian, non-democratic character of all these three institutions! – to save the banks and the bankrupt countries in return for harsh and brutal economic reforms.
To understand the ECB policies of reform, one only has to understand that the Eurozone is based on the neoliberal assumption that central banks should only take care of inflation stability. The ECB believes that stable inflation is a workable policy goal (it aims at 2% inflation a year) and the means it uses to obtain this goal are (1) limit deficits in government budgets to 3% maximum and (2) limit the national debt to 60% of the Gross Domestic Product (GDP, the yearly total production of a country).
So, when countries like Ireland and Greece threatened to go bankrupt, the ECB offered them loans in return for immediate and huge cuts in government spending through cutting social welfare and privatising public goods, and huge increases of taxation. In effect, this meant that those who created the crisis – bankers, investors, wealthy savers, etc. – were saved and the average Joe had to pay with higher taxes, less social security, and a dramatic drop in wellbeing. Jobs were destroyed in huge numbers, with youth unemployment in some countries reaching harrowing numbers up to 50%, and in general misery was created.
Did it help? Well, no. The Eurocrisis was (and is) a debt crisis. It was solved by creating more debts, mostly due to the ‘quantitative easing’ of central banks – a euphemism for large scale buying up of government debts. Of course, when money is created in large amounts, this has all sorts of adverse side effects for ordinary people. What these side effects are, and to what degree they harm people, differs per country. Which is Stiglitz’ main point: the ECB is driven by German neoliberal principles and is applied to economies and political systems which don’t operate on those principles.
Because the Euro is a common currency, with one overarching political-economic policy maker (ECB), aiming only at inflation stability, individual countries have no means to help themselves effectively in times of economic distress. Greece, for example, would have been better off if it weren’t in the Eurozone, since then it could have devalued its currency, make itself more cheaper and hence attractive to foreign investors, thus boosting employment and tax income, which could be used to ‘grow out’ of its debts.
This brings us to one of the most harmful effects of the Euro for Europeans in all countries. Since all countries lost the ability to play with the value of their own currency, the only means which national governments have to use in times of economic distress, in order to make themselves more attractive to foreign capital, is to cut production costs. In effect, this means lower wages and less social security for the employed, and lower taxes for the employers. In short, the Euro creates a race to the bottom both in terms of wellbeing for the employed and taxation for the rich.
Stiglitz shows how the period 2002-2008 (the introduction of the common currency up to the economic crisis) shows no increase in economic growth in relation to the period 1980-2002 – meaning, in effect, that the benefits of the Euro are non-existent – while in the period 2008-2015 (when the ECB policies of austerity were implemented) the Eurozone lost billions of economic growth, i.e. wellbeing, which wouldn’t have occurred when other policies would’ve been adapted.
This leads me to the final part of this review: Stiglitz’s criticism of the ECB policy. According to him, monetary policy should be aimed at full employment and redistribution (i.e. wealth creation for all). His position both acknowledges the need for free markets and the need of curbing the excesses which such liberalism would entail. He rightfully remarks that a Eurozone with a common currency but with individual (national) debts and economic policies won’t work and will only lead to suffering.
In the final chapters, Stiglitz sets out three (mutually exclusive) alternatives to continuing the current course – which would inevitably lead to countries leaving the Eurozone due to the problems involved in the current structure. (A prediction which was prophetic, when a year later Brexit became a fact.)
The first option is to reform the economic structure underlying the Eurozone. Stiglitz offers a bunch of policy changes that would transform the Eurozone into a banking union, with one currency, one supranational economic policy, a collectivization of national debts, redistribution mechanisms to ensure the rich countries don’t grow apart from the poorer ones, etc. He dryly remarks that this is the best yet least viable option – this is because the northern countries will never accept this ‘transfer union’ because they would lose their grip on Eurozone policy and have to give up a huge chunk of their wealth.
The second option Stiglitz notes is to break up the Eurozone. This can be done in various ways. One way is for Germany to leave (and perhaps some other northern countries), which would make the Eurozone more successful and robust, besides making it more fair to the poorer countries. Another option is for the worst hit countries to leave the Eurozone, so they can institute their own currencies and ‘play’ with their values accordingly – offering them a tool to grow out of their economic misery in a humane and effective way. Another option is to have various Euro’s (e.g. one for the norther countries, one for the southern), allowing all economic blocs to implement more effective policies for their respective economies. A fourth option is to destroy the Eurozone altogether and return to economic cooperation – an option which has proven to be very successful in the past.
A third option Stiglitz offers is to keep the Eurozone and the Euro, but introduce national Euro-variants, all coupled to the common Euro. This would allow all countries some form of economic freedom. Crucially, it would also restore democracy, since then the public can again have a say about the economic policies of their politicians (instead of having no say on economic policies which cost them their jobs and wellbeing, implemented by unchosen bureaucrats).
Personally, I am a staunch defender of a NEXIT. The Netherlands should get out of the Eurozone as soon as possible. This is exactly because of the reasons Stiglitz offers in this book: restoration of the democratic process, more effective economic policies, no insane monetary policy anymore (leading e.g. to the insane housing prices in the Netherlands). I am fundamentally against common European policies – on any domain. I don’t want a Bulgarian bureaucrat to decide about military matters or a French bureaucrat about our economic policies. There are no checks and balances in this system, there is no democratic link between the public and the effects of common policy, and most of all the average Joe pays for the interests of European elite of career politicians, corporate leaders and multinationals, and worst of all, the thousands of lobbyists trying to transform private interests to public policy. As Stiglitz rightfully remarks, the Eurozone serves the private interests of a global elite and shifts the costs of their policies to the public. The Euro has led to a lower standard of living and an insane loss of wealth and wellbeing for the Europeans, while only a select group of people have actually profited from the common currency. This needs to stop as soon as possible.
As Stiglitz says at the end of this book: a common currency is only a means to higher ends: human wellbeing and flourishing should be the goals. It is clear the Euro hasn't contributed to these and is actually hindering us obtaining these goals. This is an empirical fact, as is shown by Stiglitz throughout the book, even though in the perception of common people - mostly economic illiterates - the Euro 'feels so good'. They are actually deluded and are hurting themselves by believing in this myth. A common currency does not work in such a diverse continent as Europe, due to differences in culture, political systems and economic structures. It is time people wake up and come to their senses, be they left or right.
I've finished listening to the audiobook and it is so crammed full of quotable facts and figures I will buy the physical book.
IMHO this book is an excellent companion to the two books I have by Yanis Varoufakis: 'Adults in The Room' and 'And The Weak Suffer What They Must'. Stiglitz mentions Varoufakis a number of times and if I recall correctly calls him an excellent economist. Stiglitz also covers much of the Greek bailout and crisis and clearly he seems to either have been influenced by Varoufakis' experience and analysis in writing this book or perhaps they agree on so much simply because the disaster that is the Euro (and the various subsequent disasters such as the calamity that engulfed Greece and other Euro countries) is obvious to those with eyes to see.
This book is much dryer and perhaps more technical and academic than 'And The Weak Suffer What They Must' and I prefer Varoufakis' book, (which I've listened to three times and bought the physical book to look up and go over various points) partly I suppose because I'm not an economist and Varoufakis is in my opinion a great communicator and also because Varoufakis goes into detail about the origins of the EU and the fascinating history of the Euro project. Nevertheless, Stiglitz's book is very much a worthwhile listen and a useful addition to Varoufakis' books.
In an internet discussion I took part in, Varoufakis was dismissed as 'anti-American', something which I haven't found evidence for, but I am pleased that an American has written a book which backs almost everything Varoufakis wrote.
I'm British and I voted for Brexit. In another internet discussion leading up to the Brexit vote, I was surprised and taken aback by someone I know in real life (of a leftwing persuasion - who it seems is passionately against Brexit) dismissing the problems of Greece as being caused by lazy Greek tax dodgers. I was quite stunned by this, clearly we follow different media. But it was that discussion that prompted me to buy Varoufakis' books. Stiglitz spends more time on Neo-Liberalism and how it has wrecked the European Left and destroyed its credibility - although I think in the case of Britain's Labour Party, Iraq and mass immigration have added to its demise, and I was pleased and a little surprised that Stiglitz also tackles these issues.
Overall I've been both impressed and surprised by this book. Impressed by the analysis and detail, and surprised that I found so much that I heartily agreed with in a book written by someone I would have thought a little too Left for my taste. But Stiglitz very much come across as an old school lefty. I suspect he would be very happier in the company of Tony Benn and Peter Shore, rather than Tony Blair and his clones.
In the wake of Brexit, the preservation of the European project has become the current cause celebre among the continent's (and to a lesser extent the world's) center-left. You know, people like my parents. What Stiglitz argues is that the EU was indeed constructed with noble aims, and that European integration is indeed a project worth pursuing, but the architecture of EU merely reproduces the desires and ideology of the ruling class, any real economic evidence be damned, and run in complete obedience to neoliberal dictates.
This isn't a screed against the Euro per se as much as it is an analysis of how the EU has failed (if you deprive long-established nations of the ability to print their own money or set their own interest rates, you're setting yourself up for disaster, for example), and a whole litany of suggestions for how to rebuild it from a more empirical, left-leaning perspective. Strongly recommended for anyone interested in monetary policy, but also for those who don't know much. Because as much as Stiglitz's primary goal is rigorous analysis, he also knows how to argue his case persuasively and elegantly.
Un grande vaffa ai grandissimi figli di Troika del "non ci sono alternative" e del "ce lo chiede l'europa".
... [l]a storia dell'eurozona è un morality play che illustra come dei leader che hanno perso il contatto con l'elettorato possano arrivare a creare sistemi incapaci di salvaguardare gli interessi dei loro cittadini e come, molto spesso, gli interessi finanziari siano stati anteposti all'integrazione economica e all'ideologia, oltre a insegnare che quando l'ideologia e gli interessi sfuggono al controllo possono dare vita a strutture economiche che, pur vantaggiose per alcuni, rappresentano un rischio per la maggior parte dei cittadini. È anche una storia di luoghi comuni, usciti dalla bocca di politici senza alcuna preparazione economica […]
Sebbene quasi ovunque nel mondo il fondamentalismo di mercato sia caduto in discredito, specie all'indomani della crisi finanziaria del 2008, queste idee sopravvivono e continuano a trovare propugnatori in Germania, potenza dominante dell'eurozona. Immuni a qualsiasi prova contraria, e portate avanti con sicurezza e convinzione, hanno assunto i contorni di un'ideologia.
... Sempre e dovunque nel mondo, il rigore ha avuto gli effetti controproducenti osservati in Europa: quanto più severa è l'austerità tanto maggiore è la contrazione economica. Resta un mistero capire il perché la Troika abbia potuto pensare che questa volta, in Europa, le cose sarebbero andate diversamente.
... Le politiche salariali come quella tedesca […] sono una versione riveduta e corretta della svalutazione competitiva, ossia le cosiddette politiche volte a scaricare le difficoltà sugli altri (beggar thy neighbour, impoverisci il tuo vicino) che tanti danni fecero durante la Grande depressione. […]
La crescita [della Germania] è in parte dovuta a ingenti eccedenze commerciali che non tutti i paesi possono accumulare […] Se un paese ha un'eccedenza della bilancia dei pagamenti, significa per forza che un altro ha un deficit.
... Qualsiasi criterio standard si adotti per misurare i risultati economici, l'eurozona ha fallito. La sua performance è stata deludente rispetto agli Stati Uniti, da cui è partita la crisi, e anche rispetto ai paesi d'Europa che non hanno adottato l'euro. Neppure la Germania si è salvata.
I'm not sure what audience Stiglitz is trying to address with this book. The economic parts of the analysis are simplified to such an extent that your little nephew can understand the theories (which also leads to misinterpretation), the examples are very partial (focusing on dairy and medicines out of a package of hundreds of reforms), the repetion of his arguments seems appropriate mainly for readers with advanced-stage Alzheimers', the solutions presented are highly academic in nature (what's with this incomprehensible and unimplementable 'chits' idea that he keeps talking about?), and the political analysis seems intended mainly to upset European decision makers (not in the least due to his quoting his 'friend' Varoufakis, who was probably the least effective and least professional politician the EU has ever seen and whose strategy was always to annoy the creditors to the max rather than negotiate).
All together, it seems that this book was written for non-expert, non-European audiences. It may serve a purpose in spreading awareness of the imperfect economic, political and institutional structures of the European Union and, more specifically, the euro area. But I don't think any top European politicians will take this book's messages into account as a result of its sloppy and incomplete analysis as well as its condescending tone, which really makes it a missed opportunity - because, let's face it, a lot needs to change to make Europe's economy more sustainable and to make sure that the euro still exists when our little nephew graduates from high school.
The main problem I really have with this book is the lack of realism in Stiglitz' analysis. For someone who talks so much about the political dimension of the EU and the euro, the author seems to profoundly misunderstand the dynamics of decision making in the European Council and the Eurogroup. He insists that the 'muddling through' scenario is unsustainable already in the short term and we need to choose - today - to either abandon the euro or create a federal European superstate. Reality, however, has shown that muddling through has not only been the dominant strategy for over two decades now, but that its results have worked so far - in political terms that is, not economic, but I don't believe the 'European project' is likely to collapse anytime soon.
We'll be muddling through for decades to come. I agree with Stiglitz that that is far from ideal, but neither of his two proposed options are any more realistic than a continuation of the current scenario, despite its huge costs in terms of lost growth potential and skyhigh unemployment.
The book manages to explain the problems with and possible solutions for the Euro. The author manages to do so clearly, while also staying far away from European populism and without poking at any party involved in the Euro.
What I would have liked to read more of in this book are comparisons of fundamentals between the eurozone and other interesting countries/currency blocks. The author did discuss Argentina, but did not focus on the numbers. The author completely failed to analyze or even mention other interesting modern currency systems, like currencies that are pegged to the USD or the multi-country currency blocks in Africa. There was also no mention of India, where sub-federal governments also make up a large portion of GDP, which is one of the stated problems with the Euro.
The author explains the theoretical problems with the Euro very well, but the attempt to provide empirical evidence and comparisons to other currency systems is limited to the claim that the eurozone economy has lagged behind the world economy since 2008.
Nobel laureate economist, Joseph E. Stiglitz, tries to explain the origins of the Euro and how the EU got into the position after the financial crisis of 2008, where the most member countries’ growth has been stagnant for over a decade, unemployment rate at a record high. Even the USA, where the crisis had originated has been able to come out of it more quickly. The author claims that the origins of the Euro itself is flawed from the beginning and how libertarian principles on which it was built were not enough to get it out of a crisis situation. For e.g. how there is no fiscal integration among the EU members to manage the economic cycles and that all the member nations are affected unevenly by the European central bank’s monetary policies. In order for Euro to work, he suggested integration of some sort by taking the example of USA. But a model like USA is not possible in EU since there is no state wide identity in USA so if people moved across the states, there is no loss of identity; but the same is not possible in the case of EU where every citizen of a nation takes pride and associates their identity by their respective nations.
The Troika’s (ECB, EC & IMF) bad policies to rely on Austerity and wage cuts to stimulate the growth has clearly not worked according to the author. You get a sense from the author’s overall estimate that there is not as much as gain as compared to losses from overall structure – one of the examples he gives is about Finland which had the least amount of debt and still struggled to get out of the crisis. If it weren’t for the Troika’s ‘Austerity’ measures or Euro, they could have come out in less time. Author also talks about how Troika bullied Greece in accepting the policies and didn’t give virtually any voice to its opinions as a member and a nation.
Most of part of the analysis done by the author is extremely sensible although some might find the author’s tendency to left-leaning solutions. The book is extremely readable and I enjoyed it very much but at the same time found it a bit repetitive as well…
The Euro is a means to an end, not an end in itself! Will the future of Europe be threatened by this common currency? What are some lessons for globalization as it sets free all of the four input factors of production - capital, labor, and technology, except for land and makes them mobile across and beyond borders? Will globalization become an evolving system of global governance without a global government? This book will take us through the journey of Euro creation and all the policy implications during the global financial crises and its aftermath. The analysis of the book is insightful, in-depth, and thought-provoking! A must-read for us to understand the changing society in the new age of globalization with the co-existence of social media revolution, uncertain political environment, and new technology!
Greece, Spain, Italy, Cyprus,... A long list of countries who regret by now they have ever joined the euro. Stiglitz clearly explains why the currency does not bring prosperity, unity and peace on the continent. It has too many flaws. Quite bad is the architects already knew these but used the euro for political reasons.
Stiglitz is right: euro is at a crossroad. Either it agrees to fully integrate (but then many of the flaws will still exist due to historical reasons (lack of labour mobility to name one)) or one considers the split up in two or more new currencies.
Currencies come and go. Most important is that they serve their goal: price stability, full employment,... It is hard to say euro did so with flying colors.
WITH the project of the European Union, humanity seemed to be striding in the right direction with the de jure elimination of borders and the forgetting of old animosities among historical rivals. But little did anyone fathom the economic shenanigans that formulating a currency union and convergence criteria would impose on the eurozone (countries that adopted the single currency of the euro). Then came the 2008 financial crisis, the economic hardships faced by Greece, Spain, and many other eurozone countries, and suddenly, the economic union under the banner of a single currency did not seem to provide any real benefit to these fledgling economies. Rather, it seemed that the very idea that was marketed as a sort of financial panacea was, perhaps, making the situation worse. Was the idea of a monetary union flawed at its core? This is the question discussed in Nobel laureate Joseph Stiglitz’s book The Euro and its Threat to the Future of Europe.
Stiglitz starts his discussion by claiming that “the eurozone was flawed at birth.” According to him, the adoption of a single currency by a region with enormous economic and political diversity is not an easy task. It is not that he is altogether against the idea of a monetary union for Europe; he just doesn’t agree with the way in which this union was implemented. The ideology of the founders of the euro is referred to as market fundamentalism or neo-liberalism; a belief that markets can function effectively on their own and there should be minimum regulation by the government. According to Stiglitz, these views were, and still are, prevalent in the eurozone’s dominant powerhouses such as Germany and France. These are also advocated throughout the world by the International Monetary Fund and the World Bank, leading to “a lost quarter-century in Africa, a lost decade in Latin America, and a transition from communism to the market economy in the former Soviet Union and Eastern Europe that was a disappointment.”
The basic premise of Stiglitz’s book is that creating a monetary union without augmenting it with allied institutions to adjust trade and budgetary deficits proved disastrous. For example, we have seen consistent trade deficits in some countries and surpluses in others. In the case of deficits, countries devalue their currencies to discourage imports and to make their exports more competitive abroad, thus curtailing the deficit. The monetary union took this option away from the eurozone. Countries were then forced to take loans which increased their budgetary deficits. Budgetary deficits were also curtailed under the terms and conditions of the eurozone in the name of “convergence criteria” put in place with a view towards ensuring economic stability. To maintain the budgetary deficit at the prescribed limit, these countries sought to increase revenues with enhanced taxation, often affecting the middle and lower classes. When the tax raises proved insufficient, they had no option but to curtail government spending, thus the mantra of austerity popularised by the neo-liberal economists. Decreased government spending caused cuts in social support programmes, again placing the middle and lower classes at a disadvantage. It further led to negligible investment in social development programmes which meant an economic downturn resulting in even less revenue for the government in the coming years. All this caused rising levels of unemployment leading to a vicious circle of poverty.
The European Central Bank (ECB), created to manage the monetary policy, was given a narrow mandate which was only to ensure low levels of inflation, although central banks worldwide are responsible for lowering unemployment as well. When unemployment in a country is high, its central bank decreases the interest rate it charges the commercial banks. This ‘quantitative easing’ leads to credit creation in the economy which stimulates entrepreneurship, job creation, and enhanced economic activity. The only side-effect of this strategy is an increase in inflation. This mechanism, however, was not available to the struggling countries in the eurozone because the decision of setting interest rates for the euro lay with the ECB, which was not concerned with unemployment in these countries, especially when the stronger economies were doing well.
Proponents of the euro often compare it to the United States, arguing that despite the differing economic conditions of American states, they function well with a single currency. What they forget is that the US is a federal state having an institution in the central government that comes into play when a particular state faces economic hardships; for example, social security benefits are paid by the federal government.
Stiglitz has ardently criticised vertical inequality (the gap between the rich and the poor in a given society) in his previous works. In this book, he addresses the issue of inequality in the horizontal dimension (the gap between rich and poor countries) as well. His concern is that the euro project has increased inequality between rich and poor countries by transferring capital and human resources from the less developed to the more developed countries in the region. Therefore, the project proved counterproductive as it economically starved countries with fewer resources, undermining the expectations of growth for the whole region. Instead of bringing peace and harmony, the eurozone led to an increase in distrust and anger.
The folly of the eurozone project became more visible after the 2008 financial crisis. The limit imposed on fiscal deficits did not allow the worst-hit countries to opt for government-induced stimulus though massive investment programmes. These countries were forced to follow the course taken by US president Herbert Hoover during the Great Depression beginning in 1929. His policy of lowering government spending and deficit was based on the confidence theory — a term coined by economist Milton Friedman. Following this confidence theory, Hoover, according to Stiglitz, “converted a stock market crash into the Great Depression.”
Keeping in mind the prescription of Abraham Lincoln on the eve of the American civil war — “A house divided against itself cannot stand” — Stiglitz suggests that “[t]he halfway house in which Europe finds itself is unsustainable: there either has to be ‘more Europe’ or ‘less’; there has to be either more economic and political integration or a dissolution of the eurozone in its current form.” The last section of the book discusses future options to correct the wrongs committed in the name of financial prudence under the eurozone scheme. Stiglitz analyses the pros and cons of recommendations ranging from instituting regulatory bodies common to the whole of the eurozone, to adopting different currencies for different groups of countries within the region, to a complete dissolution of the eurozone.
Although Stiglitz’s book is specifically about the workings of the euro, it discusses basic concepts of political economy as well. It delves deep into the complexities of monetary and fiscal policies, the peculiarities of international trade balance, and the intricacies of inflation and unemployment, especially when an economy is facing a recession or a depression. It cuts to the heart of neo-liberal economic policies and brings out their innate tendency towards the concentration of resources and their inherent reluctance to work for the welfare of the masses. Pursuing the wrong economic policies can result in hardship for millions of citizens. It is, therefore, not only important for politicians to understand these concepts, but also for the general public to have basic know-how of these issues, so that when electing their leaders they are able to evaluate their economic policies and programmes. To sum up in the words of Stiglitz, it can be said that “a key reason that globalisation has often failed to produce benefits for large numbers in both the developed and less developed world is that economic globalisation outpaced political globalisation; and so, too, for the euro.”
I first encountered Joseph Stiglitz when his book Globalization and its Discontents was assigned to me as a required reading for my undergraduate economics studies. At that time, the world was gradually recovering from the Asian Financial Crisis(and the internet bubble). Stiglitz argued that austerity measures imposed upon Asian countries by the IMF had actually made it a lot more difficult for any country to recover from the economic haemorrhage.
A decade later, Stiglitz continues to proselytise against austerity measures, this time imposed on Greece by not only the IMF, but also by the ECB and European Commission, or simply the Troika. Matters are supposedly made worse with the adoption a common currency across the eurozone. Eurozone countries had lost the option of devaluing their currencies and deflating their way out of a recession. With the loss of both monetary and fiscal stimulus(deficit targeting), Stiglitz has presented us with several necessary changes to the current framework that would determine the outcome of this euro experiment. Would it turn out to be a successful project benefiting the citizens of the eurozone? Or would it go the way of the failed Bretton Woods System?
Mr. Stiglitz points out fundamental flaws (and its fixes) in the design of the euro (and thus the EU) and why more European (political) integration is not only desirable, but absolutely necessary if everybody in the European Union is to receive its benefits. With this, it seems Mr. Stiglitz is one of the few who actually understands what the unprecedented advantages could be of proper economic policy, on a national, European and global level.
Proposed solutions are okay, but not excellent, but let's face it, Stiglitz doesn't mention that euro can work best only with federal Europe. And for federal Europe, all those nationalistic idiots in every country should forget their ego. anyway, this book is way way better explanation than Varoufakis' moaning that no one lets them steal money anymore.
I picked up the Euro because I’ve been wanting to learn more about macro-econ and monetary policy. I don’t really understand what central banks do, or how currencies are controlled and manipulated. Euro was highly recommended, seemingly on topic, and certainly timely in the ‘22 climate.
Realistically, while I took a few clear nuggets away from this book, for my purposes it wasn’t worth the length by a long shot.
Financial Markets 101 1. Fiscal Policy deals with taxation and spending, governed by legislature (in our case: Congress). The key levers are relatively intuitive and a big part of lay political discourse.
2. Monetary policy deals with interest rates, exchange rates, and the supply of money in circulation. It is governed by a central bank (in our case: the Fed). The key levers are much less intuitive. → Buying and selling government bonds, to adjust the supply of money → Changing the reserve ratio on commercial banks, to adjust the supply of money → Exchange rates aren’t directly set, but rather indirectly set via the supply of money. → Setting the fed loan discount rate, which is the basis for all downstream interest rates.
3. Neoliberalism is associated strongly with market fundamentalism and the belief in low-touch self-correcting markets. Limited monetary policy, and austere fiscal policy to control inflation. It was the dominant economic theory in the west for most of the late 20th century, and is still strongly in favor in Germany, but increasingly out of favor among progressives in the EU/US.
Author: Stiglitz 1. Former chief economist of the World Bank, nobel prize, and chair of Clinton’s economic council
2. Much like a low reserve requirement allows commercial banks to stretch a small bit of cash into many repeated investments, a poor editor allows Stiglitz to stretch a small set of insights into many repeated chapters. 😎
3. He starts with a focused elevator pitch and unifying theory for 21st century europe, then devolves quickly into a polemic rant against neoliberalism.
4. Highly partisan in style, and sanctimonious. Everyone else is “ideology”, he alone is “evidence”. I did actually find his thesis compelling but his moralizing rhetoric and unfair strawmen tactics made it harder to appreciate.
History: EU Political Structure 1. “Until recently, the arc of history pointed to ever closer integration of the countries of the world.”
2. “Globalization seemed inevitable, and the European Union seemed at the forefront of these global trends.”
3. Following a century of world wars, mutually dependent economic integration between Germany and France was important and seen as a key ingredient for continued peace.
4. The EU was thus founded in 1993 with the signing of the Maastricht Treaty shortly after the collapse of the Soviet Union.
History: Euro Currency Structure 1. The Euro currency was always anticipated, but took several more years to land.
2. It began as a financial instrument in 1999 and was rolled out as the new formal fiat currency replacing other paper and coinage in 2002. Governed by th Troika: IMF, ECB, EU Commission.
3. Despite what hostel backpackers might expect, the driving motivation was not retail convenience, but rather continued explicit economic integration as a force for political unity and stability.
4. Germany has always been the dominant economic power in the EU, and controls most central bank policy. Notably, Germany is deeply neoliberal and accordingly drives a hard policy of austerity with the goal of “combating inflation” above all else. Merkle loves to lean on the metaphor of the “Swabian housewife”, an apocryphally frugal and disciplined citizen.
5. The first major test of the Euro (and German policy) came in the 2008 global financial crisis
6. Many EU countries are still stagnant at pre-crisis levels whereas the US has rebounded.
7. More worrying still, widespread unemployment and recession have contributed to political instability. See: rising nationalism, unsustainable migration, and plummeting birth rates.
8. So what’s going on with the EU economy? Is it a failure of individual member countries (greece, italy, spain..) and their governance? A failure of central leadership? Or a fundamentally flawed system by design? Stiglitz will argue the third.
Thesis 1. Stiglitz rejects neoliberalism, claims it is now widely agreed and evident that free markets are not stable without active financial and monetary policies.
2. This is then a big problem because individual member states vary significantly in economic maturity and posture, which means they need nuanced and different policy treatments. What is good for the strongest (germany) is often wrong for the weakest (Greece) and vice versa.
3. From there he argues that the Euro is in an uncanny valley, feet in two canoes. Overly constrained at the state-level and under-powered at the federal level, and needs to pick a side. “We need either more Euro, or less.”
4. He also argues strongly against universalizing German austerity theory, and how those policies have pushed Greece and Spain further into recession. He moralizes the issue dramatically here, lamenting how Greece/Spain are beaten up in the press as undisciplined when really he believes they were given an impossible hand by cold-hearted Germany/ECB. (See 1920’s Hoover, or 90’s Argentina for his precedent).
5. Deep dive: Member States are constrained because they can no longer pull the typical levers of monetary and fiscal policy and have thus “lost economic sovereignty”. They can’t pull monetary levers like setting interest rate or foreign exchange rate because those values are fixed and set at the European Central Bank. And they can’t pull most fiscal levers like taxation/spending because participation in the Euro requires draconian adherence to German austerity targets, enforcing global deflationary measures even when individual states are entering a recession.
6. Deep dive: Federally the Central Bank and IMF don’t have sufficient levers to support member states, because the Euro zone is not set up to be a “transfer union”. Fundamentally the bank cannot support the debt of weaker states with the excess taxes of stronger states.
7. Deep dive: Compare this setup to the United States where a central currency does work well despite comparable geographic diversity to the EU. This is due to: (a) shared safety net for citizens, (b) willingness to balance funds and debt across state-lines, eg: how NY subsidizes Alabama, and (c) massive federal spending budget of 20% GDP that can be deployed strategically to stimulate the economy in key regions. Vs 1% fed spending for the EU.
8. Deep dive: Deficits can be a problem (not always) because they require your country to borrow funds against the balance. If you can’t stay on top of the rate and repayment, it can drive a crisis. The easiest way to combat a deficit is to inflate (and devalue) your currency. This makes your exports more attractive while simultaneously making it harder for your citizens to afford imports; driving back towards equilibrium. But if you can’t control monetary policy, then you can’t as easily control your deficits, which is what we saw in Greece and Spain. Also interesting to note that surpluses and deficits always balance zero sum on a global scale, and so this is why certain economists and pundits get so mad at China and Germany for playing with their currencies and driving exports even while already running a surplus.
9. Deep dive: offshoring. You might expect the lowered friction of a common currency to encourage strong states like Germany to push more industry into cheaper regions like Spain, thereby driving balance and investment. Unfortunately that hasn’t played out. Instead it turns out that one of the strong reasons to invest in manufacturing internationally in the first place was in order to hedge against foreign exchange rate risk, and now that that rate and risk is locked, strong countries will invest more locally where the infrastructure and credit is strongest. Counter intuitive!
10. Ultimately Stiglitz says we need to either have less Euro (remove Germany, and let the more similar states balance together) or more Euro (shared banking union, increased federal spending budget).
Conclusion 1. Generally compelling
2. Superficial in many places. For instance, he hammers home repeatedly how it is not Greece’s fault that austerity made their recession worse. But never gets into the question of why Greece was uncompetitive in the first place. In his zeal to place blame on the central structure Stiglitz comes off as blind to the nuances that make Germany a repeated powerhouse for the last two centuries while southern states have struggled to perform.
3. The general warning against blindly following western 20th century neoliberal advice reminds me of Studwell’s How Asia Works, and the stark conclusion that states who bought into World Bank globalist recommendations are almost universally worse off than the ones who rejected that advice and went protectionist.
4. I’m always surprised at how simultaneously technical and subjective Economics can be as a field. It’s so analytical! But also, no one can agree on the most foundational axioms due to all the counter intuitive and hidden second order effects.
Until recently, the arc of history pointed to ever closer integration of the countries of the world. Globalization seemed inevitable, and the European Union seemed at the forefront of these global trends. The European project was one of the great projects of the 20th century. The EU was one of the reasons why the second half of the 20th century was so different from the first half, which was marked by the Great Depression and two world wars.
It is now (finally) widely recognized that markets on their own are not efficient.14 Adam Smith’s invisible hand—by which individuals’ pursuit of self-interest is supposed to lead, in the aggregate, to the well-being of the entire society—is invisible because it is simply not there. And far too little attention has been paid to the instability of the market economy. Crises have been part of capitalism since the beginning. If one or two countries within the eurozone had had problems, then this “blame the victim” theory might have had some plausibility. In every barrel there is a rotten apple. But when so many countries were having problems—even Finland, a Nordic country with good institutions that had done quite well before the euro—it suggested that there was a problem with the barrel itself. The fundamental insight to glean is that economic integration—globalization—will fail if it outpaces political integration. The reason is simple: When countries become more integrated, they become more interdependent. When they become more interdependent, the actions of one country have effects on others. There is thus greater need for collective action—to ensure that each does more of those things that benefit the other countries in the union and less of those things that hurt others.
The current halfway house—a single currency without the minimal institutions required of a common currency area—has not worked and is not likely to do so. There either has to be “more Europe” or “less.”
An economy facing an economic slump has three primary mechanisms to restore full employment: lower interest rates, to stimulate consumption and investment; lower exchange rates, to stimulate exports; or use fiscal policy—increasing spending or decreasing taxes. The common currency eliminated the first two mechanisms, but then the convergence criteria effectively eliminated the use of fiscal policy. Worse, in many places it forces countries to do just the opposite, cutting back expenditures and raising taxes in a recession, just when they should be increasing expenditures and cutting taxes.
The United States has criticized China’s surpluses, saying they represented a risk to global stability. The reason is simple: over the entire world, the sum of the surpluses has to equal the sum of the deficits. If some country is running a surplus, exporting more than it is importing, other countries must be running a deficit, that is, importing more than they are exporting. So if deficits are a problem, so, too, for surpluses. If China’s surpluses are a global problem, so, too, are Germany’s.42
STRUCTURAL REFORM #1: A BANKING UNION This reform is one on which the European leaders already agree. A common banking system—a banking union—entails more than common supervision; it entails common deposit insurance and common procedures for what should be done with banks that cannot meet their obligations (called common resolution).
STRUCTURAL REFORM #2: MUTUALIZATION OF DEBT Just as creating a banking union is necessary if there are not to be divergent and destabilizing movements in capital, some form of mutualization of debt is necessary if there are not to be divergent movements in labor. Place-based debt makes little sense in a world in which individuals are mobile; individuals can simply walk away from debts incurred by their parents or by profligate politicians or by misguided decisions of the ECB. The movements in population are not only destabilizing, they are inefficient—undermining the very rationale for free mobility of labor. STRUCTURAL REFORM #3: A COMMON FRAMEWORK FOR STABILITY Europe faces two further paramount questions: (1) how to promote stability of the eurozone as a whole; and (2) how to ensure that all of the countries of the eurozone do well. As we have noted the Maastricht restrictions on fiscal deficits can effectively be an automatic destabilizer: as a tax revenues plummet, the deficit target is breached forcing cutbacks in expenditures which leads to further decline in GDP. [..] Needs to be replaced with automatic stabilizers.
A constant state of war afflicted Europe for more than 1,000 years before 1948. The European leaders of that time, recognizing the devastating effects of the erstwhile carnage, pushed forward for a political and economic union, which materialized in the first federal movement in the European history: the Hague Congress.
The congress laid the path towards the unification of the region. One year later, the College of Europe was founded, to promote "a spirit of solidarity and mutual understanding between all the nations of Western Europe and to provide elite training to individuals who will uphold these values". Three years later, in 1952, the European Coal and Steel Community was founded to create a common industrial market among its member states, whose supreme goal was to "make war not only unthinkable but materially impossible". The road of peace and prosperity was continued in 1957 with the establishment of the European Atomic Energy Community that aimed for a nuclear Europe: a Europe developing clean, abundant and safe energy and distributing it to its member states. Ten years later, these previous two institutions were merged together in the Merger Treaty of Brussels, integrating the European region even more.
Everything culminated on the 7th of February 1992, in Maastricht, Netherlands: the “Treaty on European Union” was signed, thus founding the modern European Union as we know it and propelling Europe to new heights of economic and political integration.
It’s not hard to see why this is desirable: economic integration leads to faster economic growth, as larger markets lead to better standards of living as a result of 1) economies of scale and 2) comparative advantage. The rapid growth and low unemployment were supposed to enhance the European economic machine.
But here lies the conundrum: we are seeing high unemployment across Europe (6.2% average as of January 2020, with countries like Spain and Italy having more than 10%) and economic performance has been lagging. On every criterion by which performance is usually measured, the Eurozone has been failing. But this confusing problem has a definite root cause.
“Europe, the source of the Enlightenment, the birthplace of modern science, is in crisis.” This is how Joseph Stiglitz decided to introduce his work in “The Euro”. Europe today is suffering from a disease: not so much of the Coronavirus, but of the neoliberal plague. As much as I have attempted to be apolitical in this review, I have pathetically failed. I came to believe that just as Stiglitz suggested, economics cannot be divorced from politics.
“The Euro” prompted me to learn more about the structure of Europe, the forces that are driving it and how it all came to be. I was and remained inspired by the European project, but saddened at the same time to see it failing. I was too young to fully experience the past crises which my parents had to navigate through and it is only now that I am learning more about them. I became only disgusted of the way Europe managed the fallout of the 2008 financial crisis and today’s economic outlook is reminiscent of those times.
In Maastricht in 1992, a series of grave decisions were taken: to hastily adopt a single currency, to advance the neoliberal agenda that favours free-market capitalism, privatisation and de-regulation and to create the independent institution of the European Central Bank: a recession-making machine; one central bank without a government to back it up and 19 treasuries without a central bank.
It’s easy to see why the idea of a monetary union is alluring. A shared currency would eliminate the exchange rate fluctuations, it would reduce the transaction costs, it would create price transparency, it would lead to a more stable currency and it would help adjust to unanticipated economic disturbances. We’ve seen examples of successful implementation, such as the United States, in which a federal republic consisting of 50 different states prospered under a single shared currency.
The situation in Europe is rather different: as opposed to the different states in the US, European countries have a vast history and very different cultures. These different economic groups have different priorities and lifestyles and thus tailored economic policies are required, something which is impossible under the current form of the European Union.
The consensus among economists is that for a single currency to work, there needs to be sufficient similarity between the countries participating in the marriage. The Euro presupposes strong commercial integration, high mobility of capital and labour and common preferences between the economic groups. In the absence of these so needed similarities between the member states, the European Union decided in 1992 that a convergence criterion is required, which manifested itself in the form of fiscal prudence: today all countries in the Eurozone are required to maintain budget deficits less than 3% of their GDP and to keep the debt to GDP ratio less than 0.6. These conditions were accompanied by a culture of lowering taxes and adopting austerity instead of increasing public spending as a means of stimulating the economy.
The current European framework supports inegalitarian economic policies as a result of its neoliberal kernel which the existence of the Euro is predicated upon. Article 104 of the Maastricht Treaty prohibits states from financing themselves or through the ECB. It is thus clear that the only way to guarantee the commitment of low budget deficits is by exposing national economies to the pressure of financial markets.
A single currency entails the elimination of two essential mechanisms that might be used in a crisis: the interest rate and the exchange rate. In the absence of competitive devaluations and fiscal spending, the only recourse is to financing through private debt markets and internal devaluations through wage and price reduction within a country. Internal devaluations, which had the purpose of increasing competitiveness, restoring external balances and addressing the rising unemployment did exactly the opposite. Theft by devaluation is the technocratic equivalent of theft by looting, and stronger countries gained at the expense of the weaker. We’ve seen this in the aftermath of the 2008 crisis as the “Greek tragedy” unfolded.
Despite all of its faults, the European project deserves to be saved to promote the prosperity of its member states. Let us not forget that this integration was a result of countless years of carnage: Europe managed to protect its citizens from conflict. It would be such a waste to see such a grandiose design brought to ruin because of ideological economic theories that are already stirring up a dangerous anti-European backlash. We are seeing cases of populism being reawakened. These movements offer no solutions that will work, but it is important to understand why their message resonates.
The neoliberal force behind the design of the Euro prevents Europeans from exercising control over their money, finance, working conditions and environment.
This was a fascinating book: eye-opener and easy to read. One of my favourites!
Even though i hated this book, i managed to get on top of it just because i didnt want to feel regretful about the money i spent for it. All in all, this book is very very poor developed and the whole idea of the book pretty much revolves around only one (or two) ideas. 400 + pages for one idea with lengthy explanations seemed too much and unnecessary for me. Whole message that the author wants to bring to the reader can be packed in a very decent 10 page essay (or even less). That is why the book is sooo repetitive and semeed very watered with unnecessary explanations and references.
Also if you are not heavyly into economics - do not read this book. You will easily get lost in the midst of it. I think of myself as knowledgable person about geopolitics and international macro and micro economics. Of course I do not have "professor in economics" level of knowledge. But the writing style of this book is so ACADEMIC, which you will find yourself exhausted and lost while reading. So if anyone considering buying this book, do not waste your money on this POTUS.